Volatility & Gold

By Steve Ayer on May 12, 2025

The Tariff bombshells over the past week, starting with Trump’s announcements, followed by China’s retaliation have created massive volatility in the major stock indexes, with last Thursday’s and Friday’s (April 3^rd and 4^th) drop in the S&P 500 being some of the largest two day declines in the last 75 years.  There are many different opinions on tariffs, and specifically these tariffs, and the process by which they have been implemented, but one thing is very clear, at least for now, the stock markets of the world have definitely voted against them.   Markets typically have a shoot first, ask questions later reaction and this has certainly been no different, so now we wait for potential deals to be cut with the US, or not, like in the case of China’s retaliation and escalation from both sides.  

Before last week, declines of -10% over two consecutive days had only happened on three occasions since 1952, just to put the volatility into greater context for you.

After China’s retaliation, international stocks have weakened substantially, as well, giving back a fair amount of their outperformance over their US counterparts, but as I wrote about in last month’s newsletter, it’s very surprising to most analysts and strategists that we’re still seeing outperformance in international stocks vs US stocks despite the tariffs being geared toward hurting other countries and helping the US.  This is still true for Chinese stocks, even with tariffs being levied on China at 104% by the US.  At this point, it appears that markets are waiting for stimulus out of China and Germany along with action from international central banks along with any successful breakthrough on trade negotiations or pauses from President Trump.  Unlike in other market crises in the past, the Federal Reserve has said that it is NOT coming to the rescue short term as it is now concerned about what tariffs will do to inflation in the coming months and years, so for now, it is on hold.  These anticipated developments will most likely favor continued outperformance of international stocks vs US stocks as well, which is a sea-change relative to the past 17 years in markets. Perhaps not surprising, but the most consistent asset throughout this bear market pullback, at least thus far, has been gold and I dare say, its respective mining share’s outperformance of most other indexes and asset classes.

If stock indexes stabilize, gold could certainly have additional profit taking or it could continue to pullback with continued deterioration in the stock market as well, but what’s most interesting about gold is how underweight most Western investors are in precious metals, in general, which indicates that gold may have further to rise before a sustained pullback occurs in it. Gold’s recent strength may seem easily explained, but what about the past 13 months where gold has been outperforming US and global stocks by wide margins, having risen over $1,000 or 50% over the past 13 months?  What may gold be indicating and how does it correlate to markets overall?

I began buying gold in late 2001 and then mostly sold it in 2011 and 2012, not participating in it for many years afterwards until the last handful of years.  So, I have a lot of first-hand experience in gold along with having researched it backwards and forwards for over two decades now. 

First off, gold is very cyclical.  It often lies dormant for many years and then tends to rally for many years afterwards.  Many people scoff at gold, particularly over the last three decades in this age of our incredible technology advancements. Warren Buffett once called it a “relic” and Wall Street, for many years has ignored both gold and silver and their historic roles in portfolio risk management.  The precious metal’s respective producers/mining stocks have also been shunned due to a combination of their own mismanagement and the general sentiment towards precious metals.  There are many other reasons, but the bottom line is that precious metals represent a very small percentage of allocation in the average investor’s portfolio today relative to decades past.

It is very important to understand that gold’s previous secular up-cycles within the past 55 years have coincided with weakness in the S&P 500.  Gold’s bull market in the1970s and gold’s bull market in the early 2000’s, each lasting about 10 years, saw the S&P 500 flat over those durations while gold performed extremely well.  What’s perhaps most interesting about gold’s recent bull market, which started in early 2024, has up until recently, occurred simultaneously with strength in the stock market.  So, I am not saying that if gold continues to rise that stocks, in general, will fall over many years, but I am saying that is exactly what did occur in the two previous bull markets over the past 55 years.  The saying that history doesn’t repeat but it does rhyme, is something that we should be conscious of but, unfortunately, that doesn’t provide any guarantees on what lies ahead, though it may provide a few clues.

Recently, Bank of America and Goldman, amongst others, have increased their target prices for gold with tail risk forecasts as high as $4,500 within the next 12 months, under extreme conditions like war and a full-blown trade war, amongst other things.  We have also included a few articles below that highlight research issued by JP Morgan and Citibank talking about mining stocks currently being a good buy.  It’s interesting that Citibank actually states that today may represent a once in a 40 year opportunity to purchase mining stocks because of how cheaply they are priced relative to their underlying metals prices.

Take a look at this chart below.  It’s a chart showing the price of GDX, which is the large cap gold mining equity ETF.  The white line at the top of the chart is the price of GDX while the red line at the bottom of the chart shows money flow into and out of the ETF over that same duration.  You’ll notice that since March of 2024, when gold broke above $2,000 and started its epic run higher, that GDX (and other mining stocks) performed quite well along with gold as it rose.  What’s most interesting about this, however, is that the money flow over that same period has been extremely negative for GDX since gold broke out.  In other words, while the majority of money has been piling into technology stocks (prior to this recent sell-off) over the past year, there has been selling in GDX, resulting in negative money flowing into the GDX to the tune of about $3 billion, despite its very impressive performance. 

SOURCE:  Bloomberg Finance, LP              As of date: March 18, 2025

To me, this data/chart along with the chart of silver, indicate many things, one of which is that sentiment in mining stocks, represented by the terribly negative money flow data over the past year, shows that the public is still very negative on mining stocks, which also directly reflects upon sentiments towards gold, itself, along with silver.

Typically, major uptrends end when everyone is euphoric while downtrends end when everyone is incredibly fearful and disgusted, whether that’s in bank stocks, emerging markets, AI, crypto, mining stocks, or anything else.  Cycles typically do NOT end until sentiment dramatically changes in the direction in which the move is occurring.  There is a famous story told by Joseph Kennedy and other prominent investors from 1929, who said that when shoeshine boys and taxi drivers began telling them (not knowing who they were) what to buy in the stock market, that the euphoria had reached peak levels, and some of those professionals then sold as a result of that measurement of euphoria.  So, the rule goes simplistically like this, though it’s not remotely easy, by any stretch:   When everyone is bullish, you sell, and when everyone is bearish, you buy.   It’s hard to do because it always has you going against the grain and against momentum trends and it’s not a precise science, but that’s methodology.  As I mentioned in my Inflation paper a few years ago now, this is the psychology of a typical cycle:

“doubt the reality, accept the reality, embrace the reality, then, believe that it will never change…, just before it does.”

Technology and the Mag 7 have received the lion’s share of money flow over the past 18 months from investors.  Investors had seemingly believed that their trends would never change.  GDX, on the other hand, has had massively negative money flow over that duration, yet YTD, the Mag 7 is down significantly while GDX is still up significantly as of this writing on April 9^th, 2025. 

I am not smart enough to say with certainty that this will continue, but I do know this: gold is still unloved by the public, despite all of its outperformance, and this fact should be a positive for the sector longer-term.  As always, time will tell.  Our job isn’t to tell the market what it should be doing, it’s to focus upon risk management in your personalized portfolio and to ensure that your financial plan remains intact. 

We are on high alert now, given what has been transpiring in stocks this past week and will be in touch again soon with an update on things.