That famous Watergate-era phrase came to mind as the energy markets and gold already had been rallying when escalating tensions in the Middle East sent stocks sharply lower late Thursday. Gold broke above $2,300 an ounce, a record, while Brent crude oil topped $90 a barrel.
The energy and gold markets had been in bull-market mode well before worries intensified about a possible direct conflict between Iran and Israel following the latter’s attack on Tehran’s consulate in Damascus earlier this past week. Indeed, for investors looking to hedge such geopolitical risks, buying gold and energy stocks has proven more profitable recently than buying bearish put options on stocks.
Whatever the explanation, the price charts tell an unequivocal story. Both the precious-metals and energy sectors have been breaking out, noted Louise Yamada, who has officially retired from her eponymous technical advisory but remains on top of the markets. The gold price has broken out of a three-year sideways consolidation phase that could point to further gains to the $2,500-$2,600 range, she said in an interview.
Indeed, gold outperformed stocks for the year through Wednesday, with an 11.9% gain versus 9.3% for the
Nicholas Colas, co-founder of DataTrek Research, wrote in a research note. Expectations for Federal Reserve interest-rate cuts, while often cited as a motivation for gold’s rise, have been trimmed back to three reductions by December from upward of six at the beginning of the year. Colas notes that the two-year Treasury yield—which moves on anticipated Fed moves—has backed up significantly, to 4.66% Thursday, from 4.14% at its low in January. Yet, gold’s advance has been undeterred.
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Central-bank buying has been the prime motivator, especially by the People’s Bank of China, according to a client note from Bank of America. Physical demand for gold in China has been strong, both for jewelry and investment. The declines in Chinese real estate and equities have further bolstered gold’s status as a store of wealth for investors there.
Colas notes some recent signs of cooling, however, in central-bank buying, which isn’t unexpected. Central banks tend not to chase high prices, according to a report by Paul Wong, a market strategist at Sprott, an investment advisor specializing in precious metals. But they are apt to resume buying on pullbacks, which might provide support for the gold market, analogous to the presumed “Fed put” for the financial markets.
Gold bullion also has continued to move up despite outflows from exchange-traded funds such as
BofA notes. They have been driven mainly by investment advisors, a proxy for individual investors, although options players have been making opportunistic bullish bets on the metal.
The rallies in gold and energy might be expressing concerns about escalating geopolitical risks but with a twist, says Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. Hedging with put options on the S&P 500 hasn’t worked since Covid, she wrote in an email. Indeed, the
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or VIX, had been slumbering in the low teens until it ticked up to a still-placid 16 level as concerns about worsening Mideast tensions increased late Thursday.
Instead, she sees market participants using bullish bets on the SPDR Gold Shares, the
ETF, and the
to hedge. Silverman also notes a preference among energy investors to use the
which concentrates on the big U.S.- based majors, and the more volatile
SPDR S&P Oil & Gas Exploration & Production
ETF to express concerns about risks from conflict in the region.
The Energy SPDR, better known as XLE for its ticker, has broken out from a two-year consolidation, Yamada notes.She also points to the
ETF, which has recently broken out to a new high. As for gold, she’s sticking with the metal rather than mining shares, which have mostly lagged (although they have shown signs of life since the bullish call on gold stocks made here a month ago).
But leadership among energy shares historically has been a bad omen for the overall stock market, according to a client note from Evercore ISI’s equity, derivatives, and quantitative strategy team led by Julian Emanuel. That was the case most recently in 2022, when the XLE returned 64% while the
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ETF suffered an 18% negative return, according to Morningstar data. Consistent with that, the Evercore ISI team is sticking to its year-end target of 4750 on the S&P 500, 7.7% below Thursday’s close.
Defense wins championships, as Emanuel et al. note, citing the old football adage. But as Silverman observes, playing offense in gold and energy might be the better game plan.
Write to Randall W. Forsyth at randall.forsyth@barrons.com