What the surge in gold tells us about the stock market

Even though it’s still early in the year, my bullish call on gold has worked out well (see 2025 High Conviction Idea: Gold). Gold has reached an all-time high in all currencies. In particular, it broke out to a new high in the Swiss Franc (CHF), which is regarded as a hard currency, and the Chinese Yuan (CNY), which is reflective of Chinese demand.
 

 

Beyond the bullish outlook on the yellow metal, here are the asset return implications.
 

Gold’s bullish drivers

First, let’s consider the long-term upside potential for gold for the current market cycle. With gold approaching the $3,000 level, a 5% box and 3-box reversal point and figure chart shows an upside objective of $5,603.
 

 

The strength in gold hasn’t being driven by its conventional drivers, USD weakness and the use of the metal as a hedge against inflation. The USD has been strong, and the price of TIPs is well below its highs achieved in late 2021.
 

 

Instead, the latest gold bull has mainly been driven by emerging market demand. In the wake of the U.S. weaponization of SWIFT after the onset of the Russo-Ukraine War, EM central bank demand has spiked as China and other central banks move to de-dollarize their reserves. In addition, China has allowed insurers to invest in gold, which is another source of potential demand.
 

 

Callum Thomas of Topdown Charts has observed a longer trend of renewal in central bank demand.

 

 

A regime shift

The latest surge in gold has left the metal outperforming the S&P 500. Bloomberg columnist John Authers speculated that this may be a bearish warning for stocks. While this study represents a sample size of one, Auther’s thesis is consistent with my observation that the S&P 500 may be undergoing a cyclical top in H1 2025 (see A Long-Term Sell Signal?).
 

 

Notwithstanding the bearish implications for stock prices from gold, I think that the upside breakout at $2,100 was the signal of a regime shift in return patterns. Here are my takeaways from the accompanying chart of factor returns:

• The Gold/S&P 500 ratio is making a multi-year saucer bottom. The last time this happened0 gold staged a similar cup and handle upside breakout that resolved in a strongly bullish fashion.
• While the Gold/S&P 500 ratio hasn’t staged an upside breakout, the Gold/60-40 ratio is on the verge of a breakout. I interpret this to mean that gold has a role in balanced fund portfolios in the coming cycle as it acts as a counterweight against bond market weakness.
• I am also seeing similar long-term bottoming patterns in U.S. equity factor returns. The small-cap/large-cap ratio and value/growth ratios are all starting to bottom and turn up. Cha0nges in leadership usually occur during a bear market. The old leaders, such as th0e Magnificent Seven, lag the market and new leadership emerges out of the ashes of the bear market as the next bull is reborn.

 

 

 

An opportunity in gold miners

For investors who cannot hold gold or gold bullion by mandate, gold mining stocks may represent a useful way to gain exposure to the gold bull. Callum Thomas has argued that the valuation of these stocks is not overly demanding, both on a relative and absolute basis.
 

 

Sentiment in gold miners appears washed out, which makes these stocks a rare combination of contrarian opportunity and positive price momentum.
 

 

Tactically, gold mining stocks appear overly extended in the short run. The 14-day RSI recently reached 75 and pulled back, which is consistent with short-term tops in the past. As well, the gold miner/gold ratio reached the top of its Bollinger Band, which is another overbought signal. However, the percentage bullish indicator (bottom panel) is not extreme, which I interpret as a likely renewed bull in gold mining stocks after a brief pullback.
 

 

Another factor supporting the rise in gold prices may be a shortage of physical gold in London, which manifested itself in a spike in gold lease rates. That’s because the gold quote in New York includes any tariffs. In anticipation of the imposition of tariffs, dealers moved their physical gold inventory from London to New York, which created a physical shortage in London. I believe this fear is short term in nature and should resolve itself in the near future. There is no shortage of physical gold. Fade the panic.
 

In conclusion, a review of gold’s price action leads me to the following conclusions:

• The gold bull is just starting, with strong upside potential in the coming investment cycle.
• The market is undergoing a regime shift. Gold will be a useful asset to hedge against bond market weakness in the coming cycle, which will see small caps dominate large caps and value dominate growth.
• Gold mining stocks present a long-term opportunity, but may be vulnerable to a short-term setback.