Gold’s Blinding Comeback and What It Could Mean for Luxury Spending

Gold staged a blinding comeback this week, surging to fresh all-time highs above $2,200 an ounce. The rally, which has added around 10% to gold’s value since mid-February, caught many market watchers off-guard. But for those of us who’ve stuck with the yellow metal through its ups and downs, the price action is the vindicating result of several powerful forces aligning in bullion’s favor.

At the heart of gold’s resurgence is the Federal Reserve’s signal that it may be ready to throw in the towel. Fed Chair Jerome Powell made it clear this week that the central bank is on course to cut rates as many as three times in 2024, fueling hopes that the tight monetary policy of the past 18 months is nearing an end.

With rate cuts on the horizon, real yields have cooled, increasing the relative attractiveness of non-interest-bearing gold.

Traders have wasted little time pricing in the Fed’s dovish stance. Futures markets now see a 72% chance of a rate cut as soon as June, up from 65% before the Fed meeting. Against this backdrop, gold’s surge is, I believe, textbook price action.

Central Banks’ Insatiable Appetite for Gold Fueling the Rally

There’s more to the rally than just lower rates and a weaker U.S. dollar. As many of you are aware, central bank demand for gold has been a powerful driver as more and more developing countries join the de-dollarization movement in response to Western sanctions on Russia.

China has led the charge here, consistently adding large amounts of gold to its reserves for the past 16 months straight. Overall central bank buying reached record highs in 2022 and has shown no signs of slowing, helping to offset the selling pressure caused by gold-backed ETFs.

Soaring Gold Prices Tarnish Luxury Jewelry Demand

Higher gold prices have significant implications for the luxury goods market, where the precious metal is a key input cost for jewelry and watch manufacturers. Specifically, the 14% surge in gold prices since last fall appears to be crimping demand.

In China, the world’s largest buyer of gold jewelry, retail sales in the luxury category rose just 5% year-over-year in the first two months of 2024 despite the reopening boom, according to Bloomberg Intelligence. This could be worrying for luxury conglomerates like Richemont and LVMH, which were counting on a strong Chinese bounce-back to drive sales higher.

The pressure is particularly intense for retailers like Chow Tai Fook, the world’s second-largest jewelry chain after Cartier. In its latest quarterly report, Chow Tai Fook said non-gold jewelry sales at its stores in mainland China slid 2% compared to last year due to “weak sentiment,” writes Bloomberg Intelligence’s Catherine Lim and Trini Tan. With gold trading near 30-year highs in yuan terms, the outlook for jewelry demand in China appears challenging unless prices moderate.

Wealthy Chinese Back to Spending Abroad, With Room for Improvement

The picture isn’t all bleak for luxury brands. While the appetite for gold trinkets may be suppressed right now due to high metal prices, overall luxury spending by Chinese consumers rebounded strongly in 2023 as the country emerged from Covid lockdowns. According to research firm Bain & Company, Chinese luxury purchases within mainland China recovered to an estimated 70% of pre-pandemic levels last year, with tourism spending in Europe and Asia also witnessing a comeback.

Looking ahead, Bain projects mid-single-digit growth for China’s luxury market in 2024, supported by the nation’s still-robust fundamentals for high-end consumption. A lot will depend on how issues like China’s property sector crisis and consumer confidence play out in the coming months.

Regardless of any near-term volatility, China’s increasingly wealthy middle class will continue driving demand for luxury goods and services.

For investors, I believe the recipe is clear: Consider allocating 10% of your portfolio to physical gold and high-quality gold mining stocks. The same fundamentals that have revived gold’s current bull market—lower real rates, central bank buying, safe-haven appeal—could remain in place in the months and years ahead.

Watch our latest video on gold’s love trade by clicking here!

Index Summary

• The major market indices finished up this week. The Dow Jones Industrial Average gained 1.97%. The S&P 500 Stock Index rose 2.40%, while the Nasdaq Composite climbed 2.85%. The Russell 2000 small capitalization index gained 1.74% this week.
• The Hang Seng Composite lost 1.26% this week; while Taiwan was up 2.77% and the KOSPI rose 3.06%.
• The 10-year Treasury bond yield fell 9 basis points to 4.209%.

Airlines and Shipping

Strengths

• The best performing airline stock for the week was Embraer, up 14.8%. According to Raymond James, the data seems to indicate strong U.S. outbound travel around holiday periods, with inbound outpacing outbound travel in January 2024. Outbound outpaced inbound again the following month, February 2024, consistent with every month in 2023 and in contrast to February 2019.
• According to Stifel, the orderbook-to-fleet ratio remains at just 4.3%. That ratio is below what is needed to replace the fleet, however with an average age of 11.7 years, the fleet is basically exactly where it should be.
• According to RBC, Airbus stock has broken out, up 17% year-to-date. The improvement in sentiment is due to the strong 2023 deliveries (735 versus guide of 700), execution issues at Boeing, and an initial 2024 outlook that has been well received by investors.

Weaknesses

• The worst performing airline stock for the week was Frontier, down 6.6%. According to Bank of America, Chinese domestic air travel spending normalized significantly post-Chinese New Year, down to 9% above 2019 and declining 8% year-over-year in the first half of March. Yields were soft at 2% below 2019 levels while seat loads dropped by 5 points from February to only 79%.
• According to Morgan Stanley, the gradual erosion of the Red Sea crisis and the continual spike in container spot rates continued this week, with Drewry’s WCI Composite Index shedding another 4%. Nonetheless, it remains 77% higher than 12 months ago.
• According to RBC, Boeing provided a significant update to its 2024 and 2025/2026 outlook at an investor conference this week. For 2024, Boeing guided to first quarter 2024 free cash flow (FCF) of ($4-4.5B) and indicated that the full-year FCF will be in the LSDs (compared to current consensus estimates of $5B). The company is guiding to 2024 MAX production at a significantly lower rate than 38 per month, with more pressure on BCA margins.

Opportunities

• Bloomberg notes that Azul is looking at several options including a full buyout of GOL. Due to GOL’s bankruptcy process and regulatory approvals, Raymond James would not expect any consolidation to be effective until late 2025.
• According to Morgan Stanley, the need for new ships to comply with upcoming environmental regulations and a requirement to replace the large numbers of ships delivered between 2005 and 2010 heralds a new shipbuilding super cycle, says BRS Shipbuilding.
• According to JPMorgan, in Brazil, GOL has recently filed for Chapter 11 and has been cutting capacity on a year-over-year basis over the past months. The bank believes that this could imply a small upside to LATAM and Azul, likely translating into market share gains and some additional pricing power. Also, according to local news, Azul hired financial advisors to analyze a potential M&A with GOL.

Threats

• The main concerns CIBC hears from investors are around the uncertainties stemming from the ongoing pilot negotiations and the risks around air travel demand as the Canadian consumer feels the pinch from higher rates and inflation.
• According to Shipping Watch, the Hapag Lloyd CEO estimates that shipping companies’ fear of sailing through the Suez Canal in favor of heading south of Africa is swallowing up to 9% of the global container fleet’s capacity. “If you look at the additional capacity consumption (due to the crisis), it is probably 5-9% of the global fleet. There is no 9% spare capacity, which means that the way to create a little bit more capacity is to go much faster.”
• According to Morgan Stanley, in addition to the 36 Airbus A321s, United Airlines also told Boeing to stop building the MAX-10s for its fleet and to replace them with the MAX-9s until the 10s are certified, though it is “impossible to say” when this could happen, according to CEO Scott Kirby.

Luxury Goods and International Markets

Strengths

• China’s factory output and investment grew stronger than expected at the start of the year. Industrial output rose 7% from January to February from the same period a year earlier, the National Bureau of Statistics said Monday, and faster than the median estimate of 5.2% made by economists surveyed by Bloomberg. Retail sales increased 5.5%, roughly in line with projections.
• Expectations of economic growth in the Eurozone improved, supported by stronger economic sentiment reported this week. Germany’s ZEW indicator of economic sentiment jumped to 31.7 in March, above February’s reading of 19.9 and the expected reading of 20.5. The current situation index also improved on the back of ECB policy easing speculation.

• Faraday Future Intelligence was the best performing S&P Global Luxury stock, gaining 38.8% in the past five days. Shares have been volatile and the company was scheduled to report quarterly results on Friday.

Weaknesses

• Kering provided a sales update this week, indicating that the company anticipates a 20% decline in sales at Gucci during the first quarter, attributed to weaker data from the Asia-Pacific region. Overall group sales are expected to decrease by 10%. Following the release of this bleak update, Kering ADRs declined by 10%.
• The Preliminary Eurozone Manufacturing PMI dropped to 45.7 in March from 46.5 in February and below the expected reading of 47.0. A reading below 50 represents contraction while a reading above 50 represents expansion.
• Li Auto, a leader in China’s electric vehicle market, was the worst performing S&P Global Luxury stock, losing 18.3% in the past five days. Shares declined after the company guided lower production sales in the first quarter, below analysts’ estimates.

Opportunities

• SpaceVIP, a luxury space travel company, has enlisted the expertise of Danish chef Rasmus Munk to curate a gourmet meal for a six-hour, high-tech space balloon trip. According to Bloomberg, Munk will craft the menu for the six guests who will each pay $500,000 for the experience, which will elevate them 100,000 feet (30 kilometers) above sea level. During the journey, they will have the unique opportunity to dine while witnessing the sunrise against the backdrop of the Earth’s curvature. Despite the hefty price tag, Munk mentioned that the demand for the inaugural trip exceeds the spacecraft’s capacity.
• On Monday, Bloomberg reported that Apple is in talks to license Google’s Gemini model to power AI features like Siri in a future iPhone software update coming later in 2024, according to people familiar with the situation. Bloomberg reported that the potential integration of Google Gemini into iOS 18 could bring a range of new cloud-based (off-device) AI-powered features to Apple’s smartphone, including image creation or essay writing based on simple prompts. The companies are unlikely to announce any deal until Apple’s annual Worldwide Developers Conference in June.
• Bespoke Investment Group pointed out that 71.2% of S&P 500 stocks are currently above their 50-day moving averages, and over three-quarters of the index are above their 200-day moving averages, pointing to strong momentum. Added that when looking at longer-term 200-day moving average, current levels are approaching some of the highest since late 2021. The Federal Reserve had a dovish stance this week, implying rate cuts later in the year.

Threats

• UBS published a note on Burberry, citing several industry sources, saying the Chairman of the company is interviewing potential candidates to replace the current CEO, Jonathan Akeroyd. He only joined in 2022, and another management change could be seen as further delaying any consistent turnaround. This could present further downside to expectations with the risk of new investments required to reposition the brand, according to UBS research team.
• The secondhand luxury market is growing. eBay entered the luxury consignment sector last September with limited supply, and this Monday the company announced that it will accept new and used luxury garments from brands like Balenciaga, Dior, Prada, and Versace, among others. Users will have access to “expert sellers” who will list and sell the luxury items on their behalf.
• Richemont shares fell this week. ZKB cut its recommendation on the luxury firm to market perform from outperform, seeing risks from the high prior-year baseline. ZKB’s Patrik Schwendimann says the next two sets of Richemont results, due in May and July, harbor potential for disappointment, as the baseline is high and operating profit leverage will probably be negative.

Energy and Natural Resources

Strengths

• The best performing commodity for the week was iron ore, rising 5.53%. Iron ore has been one of the worst performing commodities this year, driven by concerns over China’s persistent property crises which have bottomed prices to under costs for some producers, perhaps forcing production cuts. Futures rallied toward $107 a ton in Singapore.
• According to Bloomberg, copper hit a fresh 11-month high in London, tracking a rally in U.S. equity markets at the start of a busy week for global central bank policy. Prices climbed as much as 1% to $9,164.50 a ton on the London Metal Exchange, recovering from losses seen earlier following mixed economic data from China. The positive sentiment waned off, however, with the copper price down nearly 3% by the end of the week.

• According to Bloomberg, U.S. gasoline futures have hit a six-month high as disruptions at Russian oil refineries and dwindling U.S. fuel stockpiles exacerbate supply concerns ahead of summer driving months. A flurry of Ukrainian drone attacks on Russian oil refineries in the past week have increased the geopolitical risk premium and left markets on edge.

Weaknesses

• The worst performing commodity for the week was lead, dropping 4.83%, on news that LME lead inventories surged 34% on a large inflow of metal into the Singapore facility. According to Bloomberg, Albemarle Corp.’s decision to halt some expansion work at its Kemerton lithium project in Western Australia has resulted in about 150 contracted construction workers being let go, as the U.S. company cuts costs after prices of the battery material crashed. 
• According to Bloomberg, uranium miner Global Atomic Corp. said it is pursuing financing strategies for the company’s Dasa project in Niger after the country’s ruling junta ended an agreement that let U.S. military staff operate from a drone base, paving the way for Russian troops to move in.
• According to RBC, uranium spot prices were down on several small volume deals with a couple of sellers lowering prices to incentivize purchases, highlighting spot market volatility and thin liquidity.

Opportunities

• An alternative energy startup in Malaysia is ready to help electric-vehicle (EV) makers source a key ingredient outside of China — using agriculture waste to create graphite, writes Bloomberg. Graphjet Technology said it can turn palm kernels into graphite — an essential component in EV battery anodes — from its facility in Malaysia, one of the world’s top producers of palm oil.
• According to UBS, all the oil agencies made bullish changes to the 2024 market outlook, reflecting the extended voluntary cuts of OPEC+ and slightly higher demand. The implied balances from all now point to a deficit, at least in the second quarter of 2024.
• According to Bloomberg, Indian oil refiners are on track to take the most American crude in almost a year after tighter enforcement of U.S. sanctions crimped trade with Russia and forced processors to look elsewhere for supply. 

Threats

• According to Bloomberg, China’s Longi Green Technology Energy Co., the world’s largest solar manufacturer, is cutting almost one-third of its staff to slash costs in an industry struggling with overcapacity and fierce competition.
• When the Federal Reserve raises interest rates, U.S. households — in aggregate — usually get a boost to interest income that outweighs the extra cost of servicing debt, reports Bloomberg. Not this time. The annual interest bill that Americans pay on mortgages, credit cards and other debt has climbed by almost $420 billion since the Fed started tightening policy in March 2022.
• According to JPMorgan, Ukraine intensified its assault on Russian oil-processing facilities over the weekend. The swarm strikes targeted a group of Rosneft refiners in Russia’s Samara region, more than 1,000 km from the Ukrainian border. Two refineries were reportedly heavily damaged, suggesting both plants could be halted completely.

Bitcoin and Digital Assets

Strengths

• Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Fantom, rising 50.68%.
• Bitcoin miner Terawulf is up 24%, the most in two weeks. The stock was the best performer among its peers, with trading volume of 16.9 million shares (59% above the 20-day average of 10.7 million shares), writes Bloomberg. Although the company posted mixed Q4 results, it did emphasize its low-cost position and highlighted its progress in reducing debt.
• Gulf Energy, Thailand’s largest private power producer, expects a new virtual bank license to help accelerate its expansion into digital businesses such as cryptocurrency trading, writes Bloomberg.

Weaknesses

• Of the cryptocurrencies tracked by CoinMarketCap, the worst performer for the week was Bonk, down 30.69%.
• Bitcoin sank to a two-week low before paring losses, reports Bloomberg, as demand for the U.S. spot ETFs dries up. The digital asset has declined almost every day since hitting a record high just shy of $73,798 on March 14. RSI levels are starting to show momentum is weaking on Bitcoin, the article continues.

• Cryptocurrency exchange OKX informed users in India that it is ceasing operations in the country. The decision was made in response to the recent introduction of new local regulations targeting offshore exchanges, writes Bloomberg.

Opportunities

• BlackRock is preparing to offer a fund through a partnership with digital asset Securitize, making it the latest Wall Street behemoth to experiment with putting money on blockchains. The minimum investment accepted from any outside investors is set at $100,000, according to the filing, writes Bloomberg. 
• U.S. crypto companies offer significantly higher compensation packages than overseas rivals, according to a survey of startups by digital-asset investment firm Dragonfly Capital. The report shows U.S. crypto salaries exceeded wages abroad by 13% on average and that equity and token incentive packages are 30% higher, writes Bloomberg. 
• Standard Chartered Bank has raised its bitcoin price prediction target to $150,000 from its previous estimate of $100,000. The new target comes from continuous strong inflows in recently launched spot bitcoin ETFs in the U.S., according to Bloomberg. 

Threats

• The SEC is waging an energetic legal campaign to classify Ethereum, the second-most popular cryptocurrency, as a security, according to U.S. companies that have received subpoenas related to an investigation, writes Bloomberg.
• MicroStrategy made its second multi-million-dollar purchase of Bitcoin in a little more than a week, raising the company’s holdings to more than 1% of all the cryptocurrency that will ever be issued. The enterprise software maker, whose corporate strategy includes buying digital currency, purchased 9,245 Bitcoin for $623 million between March 11 and March 18, writes Bloomberg.
• A woman was found guilty by a London jury of laundering massive amounts of Bitcoin for a Chinese fugitive who is thought to have orchestrated a near $6 billion investment fraud. Jian Wen, a 42-year-old British citizen, helped a Chinese fugitive launder the money between 2017 and 2022, writes Bloomberg.

Defense and Cybersecurity

Strengths

• The Lockheed Martin SR-72, dubbed the “Son of Blackbird,” aims to double the speed of its predecessor, the iconic SR-71 Blackbird, incorporating strike capabilities alongside its reconnaissance role, and generating excitement with its undisclosed features despite its association with a fictional aircraft from “Top Gun: Maverick.” Initiated in 2013 with a demonstrator planned for 2018 and a first flight targeted for 2025, the SR-72’s development has been marked by secrecy, ambitions for hypersonic speed, and the potential to launch hypersonic missiles, signaling a significant advancement in aerospace engineering and military capabilities.
• Cisco Systems finalized its acquisition of Splunk for approximately $28 billion. The transaction is expected to enhance cash flow and margins by fiscal year 2025 and boost earnings per share by 2026, with Splunk’s shares halting on Nasdaq and Cisco’s stock rising 1.1%.
• The best performing stock in the XAR ETF this week was Spirit AeroSystems, rising 6.82% after Boeing’s CFO endorsed the reintegration of the two companies for the aerospace industry’s safety and quality.

Weakness

• Chinese scientists are nearing completion of a transformative drone platform capable of splitting one large drone into several smaller, independent drones mid-flight, either to swarm or execute tasks solo.
• In retaliation for Ukrainian assaults on Russian borders, Russia unleashed a massive missile barrage on Kyiv, prompting President Zelensky to issue a stern call for global solidarity and urgent deployment of Western air defenses. Ukraine’s adept response neutralized the onslaught amidst U.S. indecision over a crucial military support package for Ukraine.
• The worst performing stock in the XAR ETF this week was Virgin Galactic, falling 16.87%, and hitting a record low of $1.37.

Opportunities

• The U.S. Air Force tested a new rocket motor in Tennessee for the LGM-35A Sentinel, a missile meant to replace the older Minuteman III ICBM, making sure it works as expected with help from Aerojet Rocketdyne. This test, focusing on the rocket’s third stage, comes after a successful test of the second stage two months earlier.
• The IAE International Aero Engines AG consortium, including RTX Corp’s Pratt & Whitney, successfully tested the V2500 engine, used in A320ceo family aircraft and the Embraer C-390 Millenium, with 100% sustainable aviation fuel (SAF) at MTU Maintenance Hannover, Germany. This marked a significant step toward greener aviation with the potential to reduce CO2 emissions to net zero by 2050.
• At its GTC conference this week, Nvidia introduced the Blackwell processor, designed to significantly advance AI model training and inference speeds. This marked a pivotal move to maintain its leading role in AI computing and further fuel its growth as the world’s third-most valuable company, supported by the adoption of these chips by major data center operators.

Threats

• Vladimir Putin, after reportedly winning a pre-determined presidential election with a record 87.3% of the vote, asserted Russia’s unstoppable pursuit of its objectives, amidst ongoing conflicts in Ukraine and tensions with the West, signaling an emboldened stance for a prolonged confrontation.
• Leonardo’s CEO, Roberto Cingolani, expressed frustration over the UK’s lack of transparency in sharing development plans and technology roles within the Global Combat Air Program (GCAP). His frustration emphasizes the need for clear communication and collaboration among Italy, Japan, and the UK-led consortium for successful next-generation fighter and system integration.
• A European trade group urged regulators to address Broadcom’s VMware pricing and business model shifts, which partners say increase costs due to a move from perpetual to subscription licensing, amidst broader concerns over market dominance and customer impacts.

Gold Market

This week gold futures closed at $2,189.50, up $6.40 per ounce, or 0.29%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 1.05%. The S&P/TSX Venture Index came in up 0.26%. The U.S. Trade-Weighted Dollar rose 0.96%.

Strengths

• The best performing precious metal for the week was gold, up 0.29%. According to Bloomberg, gold’s consolidation after climbing to a record high earlier this month should be positive for the metal in the longer term. Market participants will continue to focus on U.S. monetary policy and geopolitical tensions. 

• Bloomberg reported this week that investors added a net $1.04 billion to State Street’s SPDR Gold Shares in the latest session for which data is available, increasing the fund’s assets by 1.8% to $57.8 billion, the highest level since January 2, according to data compiled by Bloomberg.
• Bank of America says physical gold demand has been strong of late, helping gold’s rally. Linked to that, precious metals refiner Heraeus notes that, “Following the typically strong gold-buying season in the first two months of the year in China due to Lunar New Year demand, March and the second quarter tend see lower consumer demand.”

Weaknesses

• The worst performing precious metal for the week was palladium, down 8.88%, despite the net-short position being cut to a 10-week low, as reported by the weekly CFTC data release. According to Bank of America, gold prices have been strong, up 18% since the October low. However, gold equities have underperformed, with key indices up far less: the Philadelphia Gold and Silver Index (XAU) is up 15%, the NYSE Arca Exchange Gold Bugs Index (HUI) is up 15%, and the S&P/TSX Global Gold Index is up 11.5%, over that same period.
• K92 Mining announced underground operations at the Kainantu Gold Mine in Papua New Guinea have been suspended following a non-industrial incident on March 10 that resulted in the death of an employee. The mill continued to process ore from existing stockpiles.
• As of Friday afternoon, Russian rescuers had still not reached their way to search for 13 miners trapped at about 400 feet underground after the Pioner mine collapsed in Amur region on Monday, Interfax reports, citing emergency services. The cause of the accident has not been announced.

Opportunities

• Bank of America reported that its gold stocks, on average, are priced in at $1,737 per ounce, well below spot at $2,156 per ounce. The highest is Triple Flag Precious Metals, pricing $2,115 per ounce, while the lowest is Centerra, pricing $1,240 per ounce.
• According to Haywood, the gold-to-silver ratio has trended higher so far this year, to 85.6, according to Friday’s closing prices, against 87.03 on January 1, the analysts wrote. “Much of this has been due to initial gold price appreciation beating silver before both took off on February 29,” they added.
• RBC noted that while gold is up 13% over the last six months, and now up 70% over five years, EV/oz valuations for the precious metals explorers and developers they track continue to trend lower, now at an average $27 per ounce, down 40% from a peak of $46 per ounce in 2023 with gold 10% lower, and well off 2020 highs of over $80 per ounce with gold at similar levels.

Threats

• The three-week string of losses in the U.S. dollar that started in the third week of February has now had all those losses recouped with the last two weeks of trading. With gold trading sideways during that lift in the value of the dollar, this may be a headwind for gold if we continue to see renewed dollar strength.
• Eight Capital Uranium reported over the weekend that Niger announced it has suspended its military agreement with the U.S. Russia’s influence in the region is growing larger. Niger is threatening an alliance with Burkina Faso and Mali (also backed by Russia).
• Research by Bank of America suggests that India, as the second-largest consumer in the gold market, could see lower demand in March and April due to the fewer auspicious wedding dates, which are associated with a higher level of gold purchases.

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This commentary should not be considered a solicitation or offering of any investment product. Certain materials in this commentary may contain dated information. The information provided was current at the time of publication. Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (12/31/2023): 

Airbus SE

Boeing

Azul SA

Kering

Burberry Group PLC

PRADA spA

Cie Financiere Richemont SA

LVMH Moet Hennessy Louis Vuitton SA

K92 Mining

Triple Flag Precious Metals

Centerra Gold

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.

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