Gold at US$5,000: a metals rally - or a vote against America?

It’s only the first month of the new year, and yet ASX-listed gold ETFs and miners are already up around 13% and 20%, respectively; annual-type returns delivered before February has even begun.

But according to billionaire hedge fund manager Ray Dalio, this is not really a story about metals at all.

Speaking at the World Economic Forum in Davos last week, the founder of Bridgewater Associates, which manages around US$20 billion, framed the rally as something much broader and more consequential.

The emergence of the “capital wars”

Investors, Dalio argues, are not chasing gold for its own sake. Instead, the move reflects a “diversification away from the U.S.” amid what he describes as emerging “capital wars”. 

Rather than tit-for-tat trade spats, countries and investors are increasingly choosing to take their capital elsewhere.

"If you take the conflicts, you can’t ignore the possibility of the capital wars. In other words, maybe there’s not the same inclination to buy at U.S. debt and so on," he told CNBC.

Dalio warns that countries holding large amounts of U.S. dollars and Treasurys may become less willing to finance America’s deficits if trust erodes, recommending diversification away from any single country or asset class.

That message has certainly landed. Gold punched past US$5,000 an ounce this recent weekend.

“It does very well when other assets don’t do well,” Dalio said.

It's not so much the level itself, but the speed at which the market has reached it that is remarkable (see below), and it raises the question of whether this reflects a structural reallocation that still has room to run, or a trade where optimism is already fully priced in.

Romano Sala Tenna: De-dollarisation is the core driver

For Romano Sala Tenna, Portfolio Manager at Katana Asset Management, Dalio’s framing neatly captures both the state of markets and what is driving gold prices.

“Yes, that is certainly very much at the core,” Sala Tenna says when asked whether the rally reflects investors selling America and buying everything else.

“We have maintained for several years that the two main drivers are: US de-dollarisation - a push away from holding USD as foreign reserves, accelerated by the Russian invasion of Ukraine; U.S. Dollar devaluation - driven by increasing U.S. budget deficits.”

From a market perspective, Sala Tenna remains bullish even after gold’s sharp rise, pointing to the chart below.

“Technically, the price action remains constructive. The price action to date has performed with a high degree of integrity. A textbook example of an up-tending series. Short term we need to see price consolidation. However our base case is that the trend remains intact," he says.

That constructive view extends to select gold equities, particularly outside the most crowded names.

“There’s still value in select mid-cap producers. Quality developers with large resource bases look to be in the sweet spot at present," Sala Tenna says.

Among his preferred names, Sala Tenna highlighted West African Resources (ASX: WAF), saying it is “notably cheap on >30% FCF notwithstanding country risk,” while adding that “our worst case valuation is well in excess of the current share price.”

He also pointed to Vault Minerals (ASX: VAU), noting it is “effectively hedge free after many years” and growing production “at an extraordinary time for the spot gold price.” In the developer space, he described Santana Minerals (ASX: SMI) as “a standout.”

Jun Bei Liu: Gold as insurance, not speculation

Jun Bei Liu, Founder of TenCap, also sees gold’s move as structurally driven rather than speculative, reiterating from her most recent Buy Hold Sell appearance that investors “need a bit of everything” - including precious metals - in their portfolios.

“I’m still constructive on gold, even after the move,” Jun Bei says.

“This rally hasn’t been driven by speculative froth, it’s been underpinned by structural forces like central bank buying, heightened geopolitical risk, and ongoing concerns around currency debasement.”

She cautions that short-term consolidation would not be surprising, but remains confident in the medium-term outlook.

“Gold is doing exactly what it’s meant to do in portfolios. That said, after such a sharp run, some consolidation wouldn’t surprise me. But over the medium term, the fundamentals remain supportive,” she says.

Gold, she emphasises, is not a trading position.

“Gold sits at around mid single-digit allocation in our portfolio. We’ve long believed investors should have some gold, not as a trade, but as insurance,” Jun Bei says.

Within equities, TenCap prefers quality and balance sheet strength over leverage.

“For most investors, quality matters more than leverage. We prefer established producers with strong balance sheets, long mine life and disciplined capital allocation," she says.

“Unhedged exposure is attractive in this environment, but only where costs are well controlled. Juniors can offer upside, but risks rise quickly; they’re better suited to specialist investors. Physical gold has a role as a hedge, but from an equity perspective, we favour companies that can convert high prices into sustainable free cash flow.”

TenCap's preferred exposures include Newmont Corp (ASX: NEM), which she says offers “scale, global diversification and strong free cash flow generation at current gold prices,” and Genesis Minerals (ASX: GMD), which she describes as “transitioning into a higher-quality producer with improving scale and earnings leverage.”

"Both give us leverage to gold without taking unnecessary balance sheet risk," Jun Bei says.

Michael Carmody: Sentiment can turn quickly

Michael Carmody, Executive Director at Centennial Asset Management, takes a far more cautious view, particularly at current price levels.

“We find gold difficult to value,” Carmody says, reflecting his preference for assets that can be assessed using traditional valuation metrics.

"In contrast to a stock, gold doesn’t generate any revenue, income or yield."

He argues that gold’s price is driven largely by sentiment rather than utility.

“The price of gold is almost entirely determined by what a buyer is prepared to pay for the commodity,” he says.

“The more-than 70% increase in the gold price in the last 12 months has been driven by a combination of investor fear associated with geopolitical pressures, government policies, currency, inflation and interest rate risks.”

Echoes from the past lurk in the present

Carmody believes that, at this point in the cycle, risks are skewed to the downside, reminding investors of what's happened in the past as per the chart below.

He reminds investors that, as esteemed as the metal is, gold remains vulnerable to profit-taking:

• 1980 peak: Gold hit a record in September 1980 amid runaway inflation and geopolitical turmoil, before falling 57% over the following two years as monetary policy tightened and confidence in financial markets returned.
• 2011 peak: Gold surged to nearly US$2,000/oz in September 2011 after the global financial crisis. As confidence returned after the global economy came back from the brink, gold prices fell.

Indeed, nothing lasts forever.

“Gold price corrections of between 35% and 40% have occurred several times over the last 45 years. Every investor has a different risk profile but post a strong rally in gold the downside risks appear to outweigh the upside risks to us,” Carmody says.

He also contends that the rally is now closely linked to the sensationalism surrounding Trump’s policies rather than the substance of what is ultimately implemented, but this could change.

“As investors become less concerned about major policy change from the Trump administration, the demand for gold could decline through to second half of the administration’s term," Carmody says.

Centennial has long been averse to investing in gold. When asked why not buy gold miners given they appear fundamentally cheap relative to the gold price, Carmody says the operational risks should not be underestimated.

“It takes time for spot gold prices to be captured in gold production earnings. Production, grade and capex risks somewhat explain the disconnect between equities valuations and spot gold," he says.

Rather than gold miners, Carmody prefers exposure elsewhere in the resources complex, while focusing on what he describes as the bread-and-butter areas of industrials.

“At this point in the cycle, we can see value in several resource companies exposed to non-gold commodities such as BHP and Capstone,” he said, adding that mining services names including ALS, Monadelphous, NRW and Lycopodium “appear well positioned to outperform.”

What matters from here

There is no doubt that heightened geopolitical tension is underpinning gold’s rally. But markets have shown time and again that asset prices can drift well away from underlying reality.

One point raised by Carmody is worth keeping front of mind. Risk in markets ebbs and flows. And as the world moves through - and eventually beyond - the Trump presidency, there may come a point where policy uncertainty fades, confidence in the global order stabilises, and gold’s role as a refuge diminishes once again.

For investors, the key lies in position sizing and risk management.