Why you shouldn’t chase the fear-based gold rally

A gold bar is pictured in the safe deposit boxes room of the Pro Aurum gold house in Munich, Germany, August 14, 2019. REUTERS/Michael Dalder

Gold is on a tear as a mixed bag of irritants, including trade tensions, slowing global growth, and an inverted yield curve, nudge investors towards safe-haven assets. But history shows that chasing the yellow metal’s fear-based upswings on the stock market demands caution, according to BMO Capital Markets.

Gold prices are up over six per cent so far this month, and about 23 per cent over the last 12 months. Bullion has crested above $1,520, reaching its highest level since April 2013. Gold stocks have outperformed other TSX components in the past year, rising over 60 per cent.

Source: BMO Capital Markets Investment Strategy Group, FactSet, Haver, WSJ.

However, BMO Capital Markets chief investment strategist Brian Belski notes he would be reluctant to chase gold prices and stocks at these levels given the elevated fear and rhetoric driving recent performance.

“Caution is warranted when chasing extreme moves in gold price, and the unpredictable nature of the U.S./China trade war makes timing very difficult in the current environment,” he wrote in a research note on Thursday.

“While we agree a prolonged trade war can have real negative fundamental implications, we continue to believe the market, and gold stocks in particular are being driven more by swings in rhetoric and fear than actual fundamentals.”

Much of the upside for gold equities is already priced in, he added, with industry valuations above long-term historical averages.

Remember the Brexit vote?

Furthering his case against chasing gold stocks when news flow and rhetoric draw focus from fundamentals, Belski points to the gold price rally that occurred around the time of the Brexit referendum.

Source: BMO Capital Markets Investment Strategy Group, FactSet, Compustat, IBES.

“Although gold continued to rally for several weeks after LEAVE won the final vote, gold prices and stocks ultimately peaked shortly after the referendum as the uncertainty dissipated, despite being a negative vote to leave the EU,” he wrote.

“Similar to the 2015/2016 Brexit rally, gold prices appear to be event driven with momentum likely to be dictated by swings in noise and rhetoric. Investors should refrain from chasing gold stocks at these levels and remain focused on fundamentals.”

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