Gold & Sentiment, Two Sides of a Cautionary Coin
Key points:
- Sentiment indicators are robust leading indicators as they tend to be self-fulfilling.
- Gold prices are a good proxy for capital-market sentiment, and the recent spike to $3,000 an ounce foreshadows turbulence
- Coincidently, the hike in inflation expectations and drop in household consumer sentiment in surveys anticipates a drop in consumption.
- Rotation into cash, cash-equivalents, and defensive sectors may be a good idea.
The Data Isn't Good
Gold and consumer sentiment are two distinct yet telling indicators of economic confidence. Gold, known as a premier safe-haven asset, reflects the expectations of large, mostly institutional money managers for growth and inflation. On the other hand, consumer sentiment provides a glimpse into the American median household’s feelings about upcoming retail price inflation, job stability, and wages.
Currently, both gold and consumer sentiment suggest caution. Gold prices have surged 13.7% year-to-date, reaching $3,000 an ounce. This signals capital markets’ skepticism towards recent trade policy adjustments and their potential impact on economic growth and inflation.
Consumer sentiment data echoes these concerns. The year-ahead CPI inflation expectation climbed to 4.9% in February, up from 4.6% in January, according to the NY Fed’s Survey of Consumer Expectations and the Michigan Consumer Survey. Furthermore, the overall consumer sentiment index dropped to 57.9 in March 2025, its lowest level since late 2022, when inflation pressures peaked with core CPI at 6.6%.
Why Sentiment Metrics Matter for Investment Behavior
Sentiment is a self-fulfilling prophecy, thus rarely misses. Investment by corporations, fund flows by asset managers, and retail consumption by the average household reflect each constituencies’ expectations for the economy. This creates a feedback loop in which poor sentiment limits economic activity (as in, consumption + investment slows), which adds to the negative sentiment, which again hits economic activity.
The coincidence of the signal provided by gold futures and households’ surveys signal heightened worry about the economy. We suggest monitoring whether upcoming business confidence and activity - particularly investment in fixed assets - converge, and if they do we would have a trinity of concerns from the three private-sector constituencies: capital markets, corporations, and retail consumers.
A Strategic Call for Defensive Investment
Amid this economic uncertainty, investors should consider a tilt towards conservative portfolio strategies. Some prudent alternatives are diversification, particularly into cash and defensive sectors, and rotating equity exposure to defensive sectors like utilities, insurance, healthcare, and consumer staples.
Unlike growth-focused equities, which rely heavily on market optimism, defensive sectors often maintain their multiples more consistently. These sectors also benefit from heightened demand for their products and services regardless of broader economic conditions, making them a more robust choice in volatile markets.
We also look at high-income plays that have been left behind by the market outsized preference for tech-driven growth stocks, especially the so-called “Mag 7” that had an exceptional post-COVID run. Mag 7 stocks are valued for what they can be in 5-10 years by maintaining their trendline growth - therefore, an economic slowdown that affects the slope of that growth trendline has a compounded effect on their fair economic value. By contrast, value and income stocks reflect the company's value "as is" without depending on booming growth rates for the future.
