Portfolio Strategy

Goldilocks and the Three Bears

Our view: As in the 19th-century British fairy tale “Goldilocks and the Three Bears”, we have attempted to find the best ‘bed’ for gold to outperform. While current conditions appear to be ‘just right’ for gold prices to outperform, there are several variables at play that have resulted in quite the opposite. While timing the market is never an optimal strategy to follow for investors, our research shows firm evidence that long-term oriented investors can benefit from maintaining exposure to gold as an asset class throughout the entire business cycle.

This bed is too soft.Recent performance of the gold commodity has been softer than expected given the surge in inflation and the impact this has had on real yields (currently at ~-3.5%). While historically this level of real yields has been a boon for gold price performance, we caution investors from jumping to conclusions simply based on an analysis of a single variable. In fact, while the real rate remains in deeply negative territory, early phases of the business cycle have been the worst environment across historical business cycles for the yellow metal. However, the performance of gold improves as we move beyond the early phase of the business cycle.

This bed is just right. The most favourable period for gold price performance in the business cycle is during a contraction in economic activity. Looking back at contractionary periods in real GDP since the 1980s shows that gold was up on average by 12% during these periods. This is followed by late-cycle (+10%) and mid-cycle (+8%) periods. In fact, if we look at individual macroeconomic variables to model the most ideal scenario for gold, it would include: 1) negative real GDP growth (not present in the current environment); 2) a weak/weakening USD (not present in the current environment, especially with the Fed beginning to taper); and 3) negative real interest rates (currently present).

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