Gold is on track to outperform stocks for the first time since 2011, highlighting the uncertainty that has accompanied this year’s stock market gains.
While a season of strong corporate earnings has powered stocks to record highs, investors are increasingly focusing on a cluster of issues that threaten to derail those rallies.
Many are worried about coming negotiations to raise the U.S. debt ceiling, an event that has roiled markets in previous years. A failure to raise the U.S. debt limit in a “timely manner” would prompt a review of the country’s credit rating, which now stands at the highest possible level, Fitch Ratings said Wednesday.
Others are nervous over a monthslong run of uneven U.S. economic data, which some are concerned could eventually drag down corporate earnings. Recent reports have shown some metrics, such as employment, holding strong while manufacturing falters and auto demand posts steep declines.
A stock market rally that hasn’t had a significant pullback in 19 months has amplified concerns that any correction could be swift and sharp, especially with valuations for many sectors near historic highs.
The worries have boosted prices for gold, a favorite destination for nervous investors who believe the metal will hold its value better than other assets when markets turn rocky.
Gold for August delivery is up 12.1% this year to $1,288.90 a troy ounce, while the S&P has risen 9.2%. Other indicators of investor anxiety, such as the Japanese yen, Swiss franc and CBOE Volatility Index have also risen in recent weeks.
“You get a sense that beneath the veneer of the major averages, a certain level of anxiety is entering the market at large,” said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc.
Speculative interest in gold has become more positive in recent weeks. Net bets by hedge funds and other speculative investors on a higher gold price stood at 179,537 contracts for the week ended Aug. 15, the highest level since the week ended Oct. 4, 2016, according to Commodity Futures Trading Commission data.
A good portion of that buying has come from investors who believe the Federal Reserve is unlikely to raise rates a third time this year, especially as hopes fade for the White House to push through pledged fiscal stimulus programs such as tax overhaul and infrastructure spending soon. Expectations of lower rates are a boon to gold, which struggles to compete with yield-bearing investments when borrowing costs rise.
“There is a perception that without fiscal reform in the U.S. there will be very real limits on how far the Fed can tighten,” said Peter Hug, global trading director at Kitco Metals.
A weaker dollar has also boosted gold, which is denominated in the U.S. currency and becomes more affordable to foreign investors when the dollar declines. The Wall Street Journal Dollar Index, which measures the U.S. currency against a basket of 16 others, is down more than 7% this year.
Gold outgaining stocks isn’t itself an unusual phenomenon. New York Mercantile Exchange gold futures have risen more, or fallen less, than stocks in 13 of the 27 years dating back to 1990, according to the WSJ Market Data Group.
But a faster rise in gold has become rare during the postcrisis bull market that started in 2009. That reflects both the steady rise in U.S. stock indexes and the large annual gains that gold posted in the run-up to the financial crisis and its aftermath. Those gains left gold prices vulnerable to declines as economic growth picked up.
Gold last outgained U.S. stocks in 2011, as the S&P was flat in a year marked by the U.S. downgrade in August and the beginning of the acute stage of the euro crisis. Gold rose 10% that year.
That year ended up being an anxious one for investors. Just two years after the financial crisis ended, Europe struggled with intensifying concerns about many nations’ growth prospects and debt positions. Meanwhile unruly U.S. politics were confronting investors with once-unthinkable concerns about whether the world’s richest nation would default on its debt in the midst of a dispute over raising the debt limit—concerns that echo now, with Treasury Secretary Steven Mnuchin saying Monday his “magic super Treasury powers” that allow the government to conserve cash and avoid issuing new debt will run out at the end of September.
But other years of large gains in both stocks and gold haven’t necessarily foretold ill market tidings. The S&P rose 26% and gold 20% in 2003, in the midst of the recovery from the 2001 recession. The S&P rose 14% and gold 23% in 2006, the year before the financial crisis started brewing. Stocks gained 23% and gold 24% in the crisis-recovery year of 2009, and 2010 told a similar story, with stocks up 13% and gold up 30%.
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