Resources/Weekly Insights

Volume 13, Edition 25 | October 11 - October 18, 2024

Gold and Those Pesky Unknowns

Doug Walters, CFA

Gold has produced exceptional performance this year. In this week’s Insights, we discuss its role in contending with unknown unknowns.

Contributed by Doug Walters, David Lemire, Max Berkovich

If there was an MVP for portfolio assets, this year gold would have a good case for taking the honors. It is up over 30% so far this year and over 40% over the past 12 months. Back in May (All That Glitters in Your Portfolio), we spoke about the virtues of gold in a portfolio and in particular its use for diversification and rebalancing. Today, we focus on its role in navigating unknowns.

There are many scare stories out there. With the election approaching, we see investors on all sides concerned about what may come if their side does not win. We field many questions about the rising US debt burden and its implications for the dollar as the world’s reserve currency. I could go on. These are widely circulated and discussed challenges for investors. And yet, the fact that they are so widely debated should give investors comfort. The uncertainty and risk of these events should be priced in by the combined wisdom of the millions of investors that make up the market.

Of more interest (at least to me) are the unknown unknowns. These are the black swan events that no one sees coming. Covid-19 is a perfect recent anecdote. In December of 2019 were you predicting a global pandemic that would see the US economy all but shut down? And if you did see it coming would you have predicted the tremendous stock market performance since then? The answer of course is no.

So if we can’t predict these events, then what can we do? We prepare; and that brings us back to gold. Fortunes are lost trying to predict the next disaster. Fortunes are built by those that lean into the market’s uncertainty and are ready to take advantage of big market moves with a well-diversified portfolio. Gold, historically has acted as a store of value in uncertain times. If equities decline and gold holds its value, we have the option to sell some gold and buy cheaper equities. Diversification!

While gold is potentially the MVP this year, it is just one of many players in a well-diversified portfolio. Each asset, if selected properly, adds to the whole in a way that increases risk-adjusted returns. This advantage, combined with the discipline to stay invested through the inevitable market uncertainty, is a good start to long-term wealth creation.

31%

Rise of gold year-to-date

Global central bank demand as well as market uncertainty have helped to boost the price of gold this year (source: Factset, GLD)

Headline of the Week

Globe Trotting

With the Fed ducking for cover ahead of the election, we thought we would take a quick lap of the world’s economies (revisiting past comments on China). Starting here at home, Artificial Intelligence (AI) continues its evolution from “gee that’s neat” to “moving the needle.” This transition could take longer than initially anticipated partly due to human change dynamics and partly due to the technology’s maturation cycle.

Heading across the Pacific, China has dominated the headlines as they attempt to navigate the disconnect between central planners’ view of China’s future with the current malaise brought on festering property crisis. As we learned during the financial crisis and the pandemic, when China wants to, they can move with breath-taking speed. The emphasis is on “wants to.” Economists point to the need for China to shift to a more consumption driven economy (rather than investment/export driven). However, China’s leadership doesn’t want to. Their focus remains on the long-term vision for China’s emergence as an industrial and technological powerhouse. For now, leadership is trying to have it both ways by offering lower interest rates and other monetary salves while holding back on the “bazooka” of fiscal stimulus.

Heading across the Atlantic, Europe and England are shifting from inflation fighting to recession fighting. The European Central Bank cut rates for the second straight meeting noting this change in thought process. Mentions of soft landing were present, but Europe faces unique challenges (especially with Germany). The above-mentioned Chinese vision is seen as particularly impacting the German economic model. Interest rate cuts alone might not be enough to bring meaningful growth.

The Week Ahead

The U.S. data flow takes a bye week, as global central bank activity and earnings should dominate market action.

Loonie Tunes

In Canada, the economy is softening with sluggish growth numbers and poor jobs data. WIth inflation cooling, it has all the making for a jumbo cut from Bank of Canada (BoC) next week.

As America’s northern neighbor, rate moves up north impact the exchange rate with the U.S. Dollar, especially since Canada is our biggest trade partner.
U.S. Dollar has appreciated versus the Loonie by 2.6% since September.
The market has an implied probability of 75% for a jumbo cut.

Stimulating Conversation

The Peoples’s Bank of China (PBoC) sets its loan prime rate on Monday and expectations are that further stimulus will be unveiled.

Monetary and fiscal policy look be tuned to stimulus and while that is going on, markets are riding the positive risk sentiment on Chinese stocks.
With 3rd quarter growth coming in below 5% and slightly weaker than 2nd quarter, the target is still within reach and paves the way to keep pressing the gas pedal.

‘Tis the Season

Earnings season started with banks and now other parts of the economy start reporting.

The big names on the docket include IBM, GE, SAP, Tesla, Coke-Cola, Colgate-Palmolive, and Amazon.
Tesla and Amazon will catch most of the attention, but GE, now a purely aerospace company, and SAP, the biggest technology company in Europe (depending on the day) should be worth keeping an eye on.

Dueling Vibes

The International Monetary Fund will host it big meeting in Washington D.C., while Vladimir Putin hosts leaders of the BRICS nations in Kazan, Russia.

The IMF is predicted to debate how countries can contend with slowing growth and rising debt load, while the other group will focus on disrupting dollar dominance.

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