The Madness is Just Getting Started!

It’s that time of year again—the end of March Madness, a period when sports fans are fully immersed in the exhilarating action of the NCAA men’s and women’s playoff basketball games spanning several weeks. What unites sports enthusiasts during this period is the quest for an elusive perfect bracket. With more than tens of millions of Americans submitting brackets each year, anyone who has participated knows the exhilarating feeling of believing they’ve made perfect picks before the tournament begins. But as it usually goes, you get some predictions right, some wrong, all while glued to the screen, eagerly hoping every bounce of the ball favors your choices.

It’s funny. The March Madness approach doesn’t sound too different from how many investors approach the stock market.

But the analogy between the tournament and investing breaks down when it comes to asset allocation. Holding uncorrelated assets in a portfolio isn’t a matter of luck; it’s based on Nobel Prize-worthy mathematics. Recognizing when a major asset class is transitioning from a good diversifier to a potentially lucrative investment opportunity isn’t about luck either. As I’ve highlighted in my previous pieces ( Gold Can’t Be Downgraded and It’s No One’s Liability ( and When The Gold Dust Settled (, such is the case for Gold at present. What is fortunate, however, is the apparent lack of attention to this, which could also be construed as a bullish sign.

In March, Gold broke out of a nearly four-year range to reach new all-time highs above $2,200 per ounce. When Gold breaks out, many assume that geopolitical crises are driving the surge. However, there haven’t been any recent significant shocks from conflicts in the Middle East or Europe, which are typically catalysts for such rapid increases in the price of the yellow metal.

While the Federal Reserve has hinted at a pause and potential future rate cuts, we live in a world where every new piece of economic data alters the tone of Fed speakers for the week and influences rate change probabilities. Moreover, the question of whether we are heading into a recession remains unanswered. Real rates have risen at an unprecedented rate, the dollar has maintained its strength, and we are still in the midst of a three-year period witnessing a public disgorgement of gold ETFs.

Given all these factors, it’s remarkable that gold has not only remained resilient but has actually reached new highs. Gold has always been a global asset, and now, the largest buyers of gold are Non-US Central Banks. Furthermore, foreigners are increasingly showing a strong appetite for gold as they start to sell or avoid US Treasury securities. To illustrate, as of late last year, overseas private investors and central banks collectively owned approximately only 30% of all outstanding US government debt, a notable decrease from around 43% a decade ago.

As per the World Gold Council’s data for 2023, Central Bank purchases of gold totaled 1,037 tons, slightly down from the record of 1,081 tons in 2022¹. However, these levels are still nearly double the average seen from 2010 to 2021. To contextualize this buying trend, according to Alpine Macro, Central Banks are now acquiring approximately 35% of all globally mined gold production, a significant increase from about 4% in 20102.

At the forefront of this buying surge are non-friendly emerging markets like China and Russia, alongside friendly nations such as Poland and Singapore. The key takeaway is that both adversaries and allies of the United States are elevating gold as a percentage of their reserves to mitigate dependence on the US Dollar. These decisions by Central Banks are deliberate and typically signal long-term trends. Such actions provide insight into the divergence observed between gold and the trends in increasing real rates as well as the value of the US Dollar.

So why is gold starting to break out right now despite these fundamental trends persisting for years? I think the catalyst needed, which has recently occurred, was the Federal Reserve’s indication that interest rates have ceased their upward trajectory. Furthermore, the Federal Reserve is now fully committed to cutting rates before inflation decelerates to 2%, as indicated in their March Economic Projections. Their projections anticipate higher inflation and economic growth compared to previous estimates, yet they still intend to implement rate cuts. Additionally, Chairman Powell mentioned they would soon slow the reduction of their balance sheet. In essence, the Federal Reserve may have signaled that 3% inflation represents the floor. Consequently, with the Federal deficit spiraling out of control, foreign investors will prefer gold over a fiat currency subject to arbitrary printing.

So, what’s my plan? As always, I’m closely monitoring the fundamentals. I anticipate the Federal Reserve will enact rate cuts, which will likely result in a decrease in real rates—a stated goal of the Federal Reserve. At that juncture, the gold rally should be well underway and apparent to US investors. I currently recommend seizing every opportunity to accumulate gold on dips and to allocate a suitable portion of one’s portfolio to it.

Higher beta plays to spot gold prices, such as gold miners and silver, also deserve close attention, given their significant underperformance relative to gold over the past three years. If a gold bull market continues, we could witness a catch-up trade which would be a once-in-a-generation occurrence. While there’s no rush to jump into this trade prematurely, I encourage vigilant monitoring, especially considering that gold miners are likely to generate robust cash flow profits at current prices and cost structures.

To all those immersed in March Madness, best of luck! Thankfully, unlike the odds of 1 in 9.2 quintillion of picking a perfect bracket, navigating the market doesn’t rely solely on chance. This holds particularly true when we receive clear signals in certain assets, such as the current situation with gold. So, buy on weakness and play along, as these are exciting times.

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