Gold’s behavior in 2022 seemed to defy expectations. When U.S. inflation hit 9.1%, gold surpassed $2,000 per ounce, a move that aligns with its reputation as an inflation hedge. However, the correlation between gold and inflation has weakened over the decades, and in the 2020s, it has even turned negative. Inflation is now much lower than it was in 2022, yet gold prices are higher, defying traditional models.
A widely used gold price model, which incorporated factors like the U.S. dollar, real yields, and gold ETF flows, worked well for nearly two decades. But after 2021, the model’s accuracy declined, and the factors influencing gold prices shifted. The U.S. dollar remains a key driver, but real yields now have an inverse relationship with gold prices. ETF flows have also become a more significant factor, with recent inflows into gold bullion ETFs contributing to price increases.
Gold’s importance has grown for Canadian investors, with gold miners making up 13.7% of the S&P/TSX Composite Index. The Canadian Gold Index has seen strong earnings growth, trading at a P/E ratio of 13.6x, with earnings expected to grow by 21% in 2026. While gold miners and bullion are viewed positively, their recent price increases may make them slightly overvalued in the short term. Gold remains a strong diversifier, particularly in times of market stress, though it did not perform well during the recent conflict around Iran.
The debate over Bitcoin as the ‘new gold’ continues. While Bitcoin’s scarcity is often compared to gold, its performance characteristics differ significantly. Bitcoin has not provided the same level of crisis protection as gold, often falling more than equities during market downturns. A demand-driven model for Bitcoin suggests that ETF flows are a key indicator of its price movements. Currently, the model is bullish on Bitcoin, though flows have recently softened.
Both gold and Bitcoin can be confusing investments, but their unique characteristics make them valuable diversifiers. Gold offers crisis alpha, while Bitcoin provides potential performance gains with distinct volatility traits. Understanding these differences is crucial for investors looking to incorporate them into their portfolios.