Investors favor gold over other major markets

Key points:

• Sentiment toward gold is higher than other major markets like stocks, bonds, and crude oil
• This is only the 2nd time in a decade that investors favored gold over other major markets
• Historically, preference for gold over other markets was a good sign for the metal as it occurred during sustained bull markets

Investors believe gold is their best bet

Gold's breakout to the end last week excited many investors. Those who ignored it this year may be surprised to know that it's the best-performing major asset in 2024, so the recent breakout is just adding to what has been a tremendous year.

It's getting harder to ignore the yellow metal, and it's clear that more investors are starting to pay attention. On the Dashboard, we see that sentiment toward gold is higher than in three other major markets - stocks, bonds, and crude oil.

It's rare to see sentiment toward gold more optimistic than those other major markets. April 2020 is the only time in the past decade when this was the case. Gold suffered a brief dip after that, then ramped higher over the next several months.

Usually a good sign for gold

The table below shows gold's returns after investors had a more optimistic outlook on it than they did on stocks, bonds, or oil. Short-term returns were mixed, but over the medium to long term, gold enjoyed the outsized attention. Over the following year, it sported a double-digit average gain, well above any random time, with an excellent risk/reward profile.

It's notable that almost all the signals were triggered during protracted bull markets, with only four preceding substantial and sustained declines. This type of sentiment mix is not typically what we see at or near blow-off peaks in the metal.

As we've documented repeatedly over the years, investors in gold stocks have become used to disappointment. The sector has a tough time holding upside momentum, even when gold has impressive momentum.

That's also the case when investors favor gold over other assets. After the signals above, gold mining stocks consistently underperformed the metal over most time frames. Over the next 6-12 months, they did better, but it was close to being a crap shoot with an unappetizing skew of risk versus reward.

The other three asset classes noted above also mostly provided disappointing returns. The S&P 500 suffered a negative mean return up to three months later, and its average return and probability of a positive return weren't much better than bonds or oil.

What the research tells us...

Gold is getting its moment in the sun, and investors are taking note. Sentiment has climbed to a high level, both absolutely and relatively. That hasn't been too much of a headwind for the metal in the past because this has mostly occurred during the beginnings and middles of significant, sustained advances. Yes, a few times, it happened right as gold was peaking, but that was much more the exception than the rule.

A potential sustained bull market in gold is probably good for mining stocks, as well, though that has been a much dicier bet than the metal itself. Big moves in gold are not necessarily what bulls in other markets like to see, as they occur during some tumultuous times. It's not an effective sell signal, per se, but it is a yellow flag that conditions for stocks, in particular, may no longer be optimal.