Gold is Still Underpriced

We believe the next leg up for gold will be driven by a loss of confidence in mainstream positioning in equities, high-yield bonds and private equity. Concerns over tariffs may well have become a contributing factor to the gathering deflation of the financial asset bubble but overanalyzing their possible impact obscures focus on market forces that were in motion long before “Liberation Day."

The run to record gold bullion prices in 2024 and year-to-date 2025 has been mainly driven by official sector investment motivated in part by the gradual disintegration of the U.S. dollar-based system of international trade and the shakeup of the geopolitical landscape. Official sector demand has been augmented by record Asian and especially Chinese investment buying. These developments have been all but ignored by American and European retail and institutional investors captivated instead by overvalued technology and AI stocks. Their exposure to gold by any measure is at multi-decade lows.

The essence of a bear market is overvaluation and incorrect positioning. The shift in psychology that results from bear market losses will inevitably lead to a search for investment alternatives. We believe resulting capital flows will be captured by safe haven assets including gold.

Gold’s capacity to absorb new inflows is limited by its tiny “float” relative to the scale of financial markets denominated in U.S. dollars. Gold-backed ETFs are likely recipients of the shift in capital flows that we anticipate. Expanded flows into most gold ETFs must be accommodated by the purchase of physical metal. The migration of capital to gold and possibly other monetary metals could result in a price that is multiples of the current price of $3,000 per ounce.

Gold mining equities remain significantly undervalued and will benefit from further advances in metal prices. Mining profitability is leveraged to changes in gold prices which move more quickly than costs. Therefore, mining shares, in our view, offer significant torque relative to physical gold.

Even as the Trump^[1] administration walks back its stance on tariffs, the contraction in equity market valuations has further to run. On April 6, 2025, veteran market analyst and technician Stan Weinstein stated:

“While many traders and investors incorrectly think that this devastating selloff is simply the result of ‘the tariffs,’ as we showed you in detail in last weekend’s update, ‘termites’ have been at work, weakening the market’s technical structure, for the past few months, even as several of the indexes (such as the S&P 500 Index) were making new highs (and this was being ‘camouflaged’ by the narrow strength of the ‘Magnificent 7,’ just as was the case in late 1999-early 2000, before the internet bubble ‘popped,’ and in 1973 when the ‘Nifty Fifty’ of that era was ‘all the rage’ – but, in each and every case, the Advance-Decline Line had topped out well before the market reached those respective peaks). So what is really happening is that the upsetting fundamental ‘news’ is colliding with an already-weakened technical structure that was getting ready to collapse (so it most definitely couldn’t handle the added ‘worries’) – and, very simply, that ‘perfect storm’ combination has resulted in this ‘crash’!  

Market strategist Michael Belkin, who has correctly called major turning points in the stock market over many decades, noted in his report on March 24, 2025, that the fuel for a market decline could be seen in the record level of margin debt.  

“The January margin debt level was $937 billion, equal to the Oct 2021 peak of $936 billion…. Margin debt is a great indication of animal spirits…It’s not what people think about the market (like the AAII Individual Investor Sentiment Index), it’s a measure of how much stock market risk they are willing to take on with leverage.”  

You can access more insights from Michael Belkin by listening to our podcast, The New Sector Rotation.
Carter Worth, a savvy market analyst and eponym of Worth Charting noted in an April 6, 2025, commentary that the typical stock in the Russell 3000 Index, representing 98% of all investible capital in U.S. equity markets, peaked in October well before “tariffs” was on the tip of everyone's tongue. Roughly 50% of the stocks in that Index are down 35% or more (as of March 31, 2025), giving the lie to Treasury Secretary Bessent’s recent comment that the market carnage was confined mainly to the “Magnificent 7” names. The bear market is pervasive throughout all market sectors based on Worth’s analysis.
In our opinion, the current generation of investors has never experienced a genuine bear market. The notion that a bear market is simply a decline of 20% or more from the trading peak is overly superficial. The bear market of the 1970s was a grinding multi-year affair whose duration was sufficient to suffocate speculative psychology well into the 1980s.

It remains to be seen whether the current bear market will resemble one of the 1970s or of the post-2000 variety, which were mostly ended by Federal Reserve bailouts. History demonstrates that either outcome will be positive for gold.