A prominent fund has revealed it has just bought up a particular S&P/ASX 200 Index (ASX: XJO) stock despite macroeconomic forces triggering a massive drop in price.
Gold has traditionally been considered a safe haven investment in troubled economic times. However, that is complicated by the fact that historically the value of the precious metal has dipped when interest rates rise.
And this is exactly what we've seen the past few weeks, according to Firetrail analysts.
"Under this backdrop, Australian gold stocks have sold off and now trade 25% below peaks reached in July 2020," read their memo to clients.
"We believe the sell-off in Australian gold stocks is overdone, and rising recession risks lead us to believe gold is an attractive asset class for investors over the coming 12 months."
Buy into gold but also harvest an income
The over-selling has led to the Firetrail Absolute Return fund adding to its position in gold miner Newcrest Mining Ltd (ASX: NCM).
The Newcrest share price has plunged more than 33.5% since late April.
The Firetrail team's conviction is backed by a curious market anomaly that it recently discovered.
"The gold price denominated in Australian dollars is near decade highs. The ASX Gold Index has historically followed the AUD gold price, but it is now trading at a large relative discount."
While gold as a commodity never pays an income, Newcrest does pay out a dividend yield of 3.4%.
Among the wider professional community, support for Newcrest shares is polarised.
According to CMC Markets, eight out of 17 analysts currently recommend it as a strong buy, while eight others think it's a hold.
Watch for the US dollar
ETF Securities head of distribution Kanish Chugh agreed that it might be gold's turn to shine in the coming period.
"Geopolitical tensions remain high, with war in Ukraine destabilising eastern Europe and Nancy Pelosi's visit to Taiwan causing alarm in China," he said.
"While these events are reflected in the gold price at this stage, they serve as a reminder that gold typically finds support during times of crisis."
Chugh added that as US interest rates rise, the US dollar might weaken.
"Should the dollar retreat, we could see further support for gold," he said.
"Gold is also typically seen as a core diversifier for smoothing portfolio volatility as an 'insurance overlay'."
