Since October 5, gold prices have been doing what they tend to do: Rise amid economic and geopolitical uncertainties. That’s why so many investors consider gold either a safe haven or a hedge against falling stock prices.
Gold’s price rise began before the war in the Middle East began, as investors and analysts began to grow more concerned about cracks in the economy, including the unaffordability of housing due to high mortgage rates.
Prices continued rising as the Middle East conflict began and expanded.
All the elements are in place at the moment to support an increase in gold prices.
Gold at Highs, Relative to Previous Decade
For starters, gold typically rallies during bouts of high inflation, or at least concerns about higher inflation. Since August 2020, gold prices have been at highs, relative to the previous decade.
In fact, gold rose on October 19 as Federal Reserve Chairman Jerome Powell, in a speech, didn’t take further rate hikes off the table.
The theory about gold is: If a currency, like the dollar, sees its purchasing power reduced, then gold will hold its value. However, as you can easily see, gold prices do fluctuate and the metal is, like any other commodity, at the mercy of economic and financial conditions at any given time.
Take a look at the iShares Gold Trust (NYSEARCA: IAU) chart and you can see those price fluctuations.
In addition, gold often shows a low correlation to the stock market. For example, the IAU ETF has underperformed the S&P 500 on a year-to-date basis, but is outperforming in the past three months, as the benchmark index has declined.
Tangible Asset that Retains Value
Economic uncertainty, such as a recession or bear market, can also result in a flight to gold. In those conditions, investors view gold as a tangible asset that retains value when traditional financial instruments, like stocks and bonds, become risky.
Those conditions are in place as the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) and the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG) are trending lower at the same time, which doesn’t usually happen.
Another condition that’s in place to boost the price of gold is geopolitical tension. In this case, we’ve seen gold rise in the days since the Israel-Hamas war began, and since it escalated.
The IAU ETF rose 5.37% the week ended October 13, and was up another 2.40% the following week, as of October 19. Investors consider gold to be a safe haven during uncertain geopolitical climates, as it’s a borderless asset, unlike currency, which faces very specific risks.
Mid-Cap Gold Stocks Glimmer Brightest
Toronto-based Alamos Gold is a mining company engaged in the exploration, development, and extraction of precious metals, including gold. The stock is up 6.33% in the past week, as you can see using the Alamos Gold chart.
This is a mid-cap stock which, along with fellow mid-cap Gold Fields Limited, is leading the industry in terms of recent price gains. The Gold Fields chart will show you the stock’s increase of 8.47% in the past week and 15.52% in the past month.
While mid-cap gold stocks are leading the market, the biggest gold companies, Newmont Corp. (NYSE: NEM), and Barrick Gold Corp. (NASDAQ: GOLD) are also showing solid price gains in the past three weeks.
Watch for Gold's Volatility
As a whole, the industry is becoming more attractive, but investors have to be cognizant of the fact that these stocks can turn around quickly, due to their exposure to a commodity known to be volatile.
Investors can treat gold in one of two ways. In the first, a stock or ETF can be considered a long-term holding, used as part of a diversified portfolio.
In the second, it can be a short-term trade or swing trade. This can result in capturing gains when gold is trending higher, but this approach requires constant monitoring.