What the Euphoric Equity Markets Suggest about Gold



US equity market euphoria

US equity markets (SPY) (SPX) (DIA) (DOW) have been on a high since President Trump’s win in November 2016. Hopes of deregulation, tax cuts, and fiscal spending have spurred the markets, which have risen more than 10% in the last four months.

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Market participants’ take

During a Bloomberg interview, BlackRock’s Global Allocation Fund portfolio manager, Russ Koesterich, stated that equity valuation in US markets is stretched and there will be lower returns over the next three to five years. He also said that if investors feel that tax reforms and infrastructure spending will be pushed back on the agenda, markets could react.

According to the South China Morning Post, Macquarie feels that “equity investors have underestimated the political, trade and deglobalisation risks, whilst over-anticipating the fiscal stimulus potential and the capacity to implement and fund such tax cuts.” It suggests that investors should park some of their money is safe-haven assets such as the US dollar and gold.

According to Bloomberg, Credit Suisse global head of risk advisory Mark Connors believes that “though growth could pick up down the road, valuations may have stretched too far for comfort.”

Legendary investor Bill Miller, on the other hand, has a different take on equity valuation. He said that the equity market is not terribly expensive and that the market might look less expensive on an absolute basis relative to historical performance. However, in the past, we’ve seen that the equity bull market continued as ten-year and 30-year Treasury yields (BND) moved towards 6%. Currently, the ten-year Treasury yield is 2.5%.

Overall, there is a growing consensus that US equity market valuation may be stretched. These levels could be justified with high growth, which would depend on policy decisions, fiscal spending, and tax reforms.

Outlook for gold

In light of this high valuation, investors could seek other investment options. Gold could be one of those alternatives, especially as inflation picks up. Gold’s strengthening could buoy gold miners such as IAMGOLD (IAG), Kinross Gold (KGC), Hecla Mining (HL), and Coeur Mining (CDE). Miners contribute 4.6% of the price determination of the VanEck Vectors Gold Miners ETF (GDX).

Gold miners (JNUG) are a leveraged play on gold. They can appreciate more than gold prices in the event of an upturn, and vice versa.


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