Will the Gold Rally Last?

Trish Regan is one of America’s most recognized financial journalists and digital media hosts. An award-winning reporter, author, television personality, and speaker, Trish is a leading economic and political thought leader who helps viewers to better understand the most critical issues facing the economy and American business today. With extraordinary access to newsmakers and industry sources, as well as a knack for anticipating opportunities and risks in investing, Trish leverages her knowledge of how the mainstream media works to enable subscribers to best understand the information moving markets.

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Trish credits her start in journalism to her fifth grade position as school correspondent for her local New Hampshire newspaper. But, while Trish showed an early interest in reporting and writing, it wasn’t until years later that she chose to make journalism her career. In fact, she originally intended to pursue a career in finance and worked as an analyst in emerging debt markets at Goldman Sachs while a student at Columbia University. Fluent in Spanish, Trish focused primarily on Latin American sovereign debt markets including Argentina, Mexico, Venezuela, and Brazil, but when Bloomberg Television offered her an opportunity to work as a correspondent, she made the jump into financial media.

Beginning at Bloomberg in 2000, Trish was on the front lines as the dot-com bubble burst. She covered its aftermath from Silicon Valley and San Francisco as a correspondent at MarketWatch before moving back to New York to work as a correspondent for CBS News. In 2006, Trish returned to her financial roots as an anchor on CNBC’s top-rated daily markets program The Call where she reported on the 2008 financial crisis in real time. While an anchor at CNBC, Trish also reported business news for NBC's Nightly News and The Today Show. In addition, she produced and hosted the two most highly rated documentaries in CNBC's history – Marijuana Inc and Marijuana USA, which investigated a massive and fast-developing underground industry. Trish predicted that industry would soon become mainstream in her book Joint Ventures: Inside America's Almost Legal Marijuana Industry, published by Wiley & Co. in 2010.

In 2011, Trish went back to Bloomberg Television to anchor the network's afternoon market close coverage as host of Street Smart with Trish Regan. While at Bloomberg, Trish was the network's main political anchor for all political television coverage of the 2012 election, including both the Republican and Democrat conventions and the election itself. From 2013 through 2016, Trish also worked as a front-page economic columnist for USA Today, writing on the biggest trends in business, markets and the economy.

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Trish graduated with honors from Phillips Exeter Academy before going on to study opera at New England Conservatory and graduate cum laude with a degree in history from Columbia University. While at Exeter, Trish was the first-place winner of the Harvard Musical Association’s Competition for Excellence in Music, becoming the first singer to win the top prize since the organization was founded in 1837. She later studied opera and German at The American Institute for Musical Studies in Graz, Austria. Her operatic singing skills enabled her to represent her home state as Miss New Hampshire in The Miss America Pageant, where she won the talent competition and the first B. Wayne Award for the contestant with the most promise in the performing arts.

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A successful fund manager and stock picker, Rob Hordon has extensive experience investing across asset classes, sectors, geographies and strategies. With consistent emphasis on ways to preserve and grow assets and manage risk, Rob has offered guidance to thousands of financial advisors and wealth management professionals in the United States and abroad over the course of a multi-decade Wall Street career.

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Rob’s professional investment career began in the late 1990s as an associate in the Equity Research department of Credit Suisse First Boston, where he covered wireless telecommunications stocks at the dawn of the mobile phone era. As a recent college graduate, Rob had a front row seat at one of the epicenters of the tech bubble. He witnessed for the first time the stock market’s potential to deliver immense value creation through innovation but also its characteristic tendency towards excess.

Rob went on to obtain his MBA from Columbia Business School, where he focused on security analysis and through his course work learned from some of the top investment practitioners in the country. Upon graduation from Columbia, he took an analyst role in the Risk Arbitrage department of a firm then called Arnhold and S. Bleichroeder Advisers, which would later be renamed First Eagle Investment Management.

76research co-founder Rob Hordon

For approximately seven years, Rob worked as a member of a small team that ran a hedge fund strategy focused on identifying mispriced long-short opportunities among companies involved in merger and acquisition activity. Just prior to the 2008 financial crisis, he transitioned over to First Eagle’s Global Value team under the auspices of the legendary international investor Jean-Marie Eveillard.

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As an analyst on the team, Rob was responsible for initiating and covering several billion dollars of public equity investments across a wide range of industry sectors and countries. This move also reunited him with renowned Columbia Business School economist and author Bruce Greenwald, who had recently joined as Director of Research. As colleagues and mentors, Bruce and Jean-Marie would become the two most formative influences on Rob's investment career.

In 2011, Rob proposed and worked with the team to develop a new multi-asset investment strategy built around the same long-term value-oriented investment philosophy pioneered by Jean-Marie. As co-portfolio manager of the First Eagle Global Income Builder Fund, Rob was directly responsible for over a billion dollars of assets under management with a particular focus on dividend-paying stocks and credit instruments. Rob and his partner later re-created and managed this strategy at a London-based boutique investment firm, J O Hambro Capital Management, beginning in 2017.

In 2023, Rob teamed up with his longtime friend Trish Regan to form 76research, where he is Co-Founder and Chief Investment Strategist. This entrepreneurial venture merges his passion for investing, research and writing with his desire to help others benefit from the long-term wealth creation potential of the stock market.

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The son of an economics professor and elementary school teacher, Rob is a proud husband and father of three whose interests include history, philosophy, sailing and world travel. He was born in New York City and grew up in northern New Jersey, where he attended local public schools.

Rob Hordon is a Chartered Financial Analyst. In addition to his MBA from Columbia Business School, he received his Bachelor’s degree in Politics from Princeton University and was awarded a Certificate in Political Theory. His senior thesis, entitled Justice without Truth: Contingency in American Moral Thought, explores how the philosophical tradition of American Pragmatism offers a roadmap out of the moral and political abyss of postmodern relativism.


Will the Gold Rally Last?

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Persistent inflation and a spike in geopolitical risk have driven a surge in the gold price. Gold has advanced approximately 15% since the end of February through mid-April.

Should gold investors pocket recent gains or hang tight?

The move in gold marks a significant breakout from its post-Covid trading range. Gold broke $2,000 per ounce back in August of 2020, following a pandemic-era rally that was fueled by falling interest rates and risk aversion. Since then and through February 2024, the gold price basically fluctuated within a $1,700 to $2,000 band.

At the beginning of March 2024, however, gold prices finally surged through $2,000. This momentum continued into April. Many analysts are now talking about $3,000 as the next stop.

What is driving the recent strength? These things can never be understood with scientific certainty, but we would highlight a couple of key events in March and April.

Persistent inflation and a recent spike in geopolitical risk have driven a surge in the gold price. Gold has advanced approximately 15% since the end of February through mid-April.

Should gold investors pocket recent gains or hang tight?

The move in gold marks a significant breakout from its post-Covid trading range. Gold broke $2,000 per ounce back in August of 2020, following a pandemic-era rally that was fueled by falling interest rates and risk aversion. Since then and through February 2024, the gold price basically fluctuated within a $1,700 to $2,000 band.

At the beginning of March 2024, however, gold prices finally surged through $2,000. This momentum continued into April. Many analysts are now talking about $3,000 as the next stop.

What is driving the recent strength? These things can never be understood with scientific certainty, but we would highlight a couple of key events in March and April.

(1) Dovish Fed meeting

The Fed meeting in mid-March was widely seen as a dovish event. Despite elevated inflation readings in January and February, strong economic growth and low unemployment, the Fed indicated it was still on track for three rate cuts this year. Coupled with comments about a potentially rising “neutral rate,” gold investors perceived an election year stance that was soft on inflation.

(2) Central bank buying

Central banks continue to be net buyers of gold, especially emerging market countries like Turkey, China and India. Central banks have a major influence on gold demand and are believed to own approximately one-fifth of the total supply of gold that has ever been mined.

As a reserve asset, gold is unmatched in its safety, if held in a vault within a country’s own borders. U.S. asset seizures and sanctions against Russia have raised the risk of legal maneuvers or other weaponizations of the banking system that undermine international claims to sovereign bonds. Gold is unique among reserve assets in that it is no other nation’s liability (so long as crypto remains a fringe asset within central banking circles).

On April 4, U.S. Secretary of State Anthony Blinken pronounced that Ukraine will eventually become a NATO member. While this was not the first mention of it, the Biden administration appears to be doubling down on the core diplomatic disagreement that gave rise to the conflict in the first place.

The U.S. and Russia cannot engage militarily, due to the logic of mutually assured destruction. This leaves the global banking system as the most likely theatre for an escalation of the war. Central banks around the world have been taking notice.

On the evening of April 13, Iran launched a surprise missile and drone attack on Israel. While gold has been relatively stable since then, it is conceivable that some of the prior move in gold was driven by governments or other actors who anticipated this unprecedented military maneuver by Tehran.

Will gold rise further?

We like gold and consider it an important part of any well-diversified portfolio. Gold has delivered attractive returns over long periods of time (better than 8% annualized over the past 20 years).

Gold has also exhibited relatively low correlation with stocks. In moments of crisis, like the present, gold is often negatively correlated with stocks. As equity markets have sold-off in recent weeks, gold has once again shown its value as a complement to an equity-tilted portfolio.

Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted. - Former Fed Chair Alan Greenspan, speaking to Congress, 1999

With few cost-effective industrial applications, gold is ultimately just a store of value (even when used as jewelry, especially in India and China). Due to physical scarcity and mining complexities, the gold supply tends to grow no faster than 2% per year.

Since gold produces no cash flows, the value of gold is therefore best understood in relative terms. When gold becomes very expensive relative to other asset classes, investors who own gold within a portfolio should take the opportunity to realize gains in their gold investments and rebalance.

For example, in 2011, the gold price (as we now know with the benefit of hindsight) became extremely extended.

The closing price of gold in New York peaked on August 22, 2011 at just under $1,900 per ounce. This was more than three times higher than where gold had closed exactly five years prior. Gold would then lose approximately 40% of its value over the next four years or so, when it bottomed at just under $1,100 per ounce at the end of 2015.  

Despite the recent run-up in gold, we do not believe gold is anywhere close to dangerous relative valuation levels, like what we witnessed in 2011.

In fact, in historical terms, the gold price seems well-supported—if not cheap.

The Federal Reserve defines the “monetary base” as all currency in circulation plus bank reserve assets. It is a commonly used measure of the total quantity of U.S. dollars that have been injected into the economy.

Below, we chart the price of gold relative to the monetary base. When gold ran to $1,900 in 2011, it had significantly outpaced growth in the U.S. money supply.

Source: FactSet, Federal Reserve

The relationship between the U.S. monetary base and the gold price is far from perfect and is not the only variable to consider. But at the risk of oversimplification, the more dollars in existence, the more valuable gold should be in dollar terms.

One compelling explanation for the gold price correction after 2011 was that gold investors were too enthusiastic about continued sharp growth in the money supply. The monetary base would soon enter a long period of stabilization.

It was not until the pandemic-era expansion of the monetary base, beginning in 2020, that the gold price finally started moving again. While gold has performed reasonably well over the last five years, this performance is largely in line with U.S. money creation.

Gold is potentially only now catching up with recent money supply growth. Whereas the gold price has increased approximately six-fold over the past 20 years, the U.S. monetary base has increased approximately eight-fold.

The role of interest rates

The very sharp upward move in interest rates over the last several years has had the effect of redirecting demand from gold to bonds. The Fed Funds Rate went from effectively zero to 5.25%-5.50%.

This was a dramatic reversal. When you can suddenly earn much higher risk-free returns in government paper, this draws buying demand away from assets like gold that do not generate cash flow. The likely impact was to suppress upward momentum in the gold price that would have otherwise followed increases in the money supply.

We are now at a moment when markets expect the Fed to start cutting rates. To be fair, we are skeptical that the current “dot plot” prediction of future rate cuts will come to fruition. As the March inflation report that was released on April 10 just indicated, inflation does not seem to be subsiding at hoped for rates.

Short-term interest rates may not get cut as planned, and long-term rates may continue to drift upward in response to persistent inflation. But any upward pressure in rates is unlikely to match the intensity of rate hikes that started in 2022.

When it comes to rates, competition from rising bond yields is subsiding and possibly reversing. On the margin, bonds are becoming less attractive versus gold.

Gold versus other asset classes

Money supply is only one reference point that should be considered when trying to assess the relative price of gold. Gold can also be seen through the lens of other asset classes, such as the stock market.

The price of gold relative to the S&P 500 Index is close to its lowest levels in decades. The ratio is down approximately 70% from the 2011 peak. Again, this is not a perfect mathematical relationship, but another useful indicator of relative value.

Source: FactSet

The price of gold is difficult, if not impossible, to forecast. But over time, gold moves in relation to the total supply of money and the total nominal value of other asset classes. The current gold price appears to be supported by the upward trajectory of these competing stores of value, which have also benefited from inflation.

Geopolitical risk

The U.S. response to the Ukraine conflict has been a catalyst for a reassessment of the global monetary architecture. It has introduced risks that central bankers around the world will not soon forget.

This calls for a longer discussion, but many believe we are now at the early stages of a “de-dollarization” process—a global phenomenon in which private investors and central banks rotate from U.S. Treasuries to other assets, including gold.

While both the Ukraine/Russia and Israel/Iran conflicts remain unresolved, China has not lost its interest in consolidating Taiwan. We view a move by China to take Taiwan as arguably the biggest geopolitical risk facing markets in the years ahead.

China, like Russia, is a nuclear power. Since direct military confrontation is almost unthinkable, a strong economic response to a possible invasion of Taiwan is more likely. Such a response to a Chinese move on Taiwan would likely inject a degree of turmoil into the global financial system that far surpasses the impacts we have seen thus far this year.

It is hard to imagine an invasion of Taiwan (or even just a heightened perception of the possibility of it happening) not creating demand for gold from all corners of the globe.

Multiple drivers

To sum up, we view the recent move in gold as justified by several factors. Post-pandemic growth in the money supply, nominal wealth creation across other asset classes, moderating or declining interest rates and heightened geopolitical risk all support gold demand.

As we saw in 2011, gold also has a historical tendency to take on momentum and become detached from underlying economic drivers. We do not advocate chasing bubbles—but we also do not object when we own investments that have the potential to get swept up in a wave of positive momentum in the future.

International conflicts are inherently unpredictable. A soothing of tensions may lead to a retreat in the gold price, while an escalation of any of the ongoing conflicts (or the emergence of a new one) could intensify demand.

Even if there is short-time relief, many central banks around the world are likely to continue to prioritize gold reserves over the paper obligations of the U.S. government or other aligned nations. The same goes for private investors.

We continue to recommend a material portfolio allocation to physical gold and other gold-related investments. Gold-related investments remain a core component of our Inflation Protection Model Portfolio.

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