A significant development for many, gold has been on the decline since the beginning of the year, as has silver. However, precious metals are supposed to protect against uncertainty, which is abundant, and also offer protection against inflation, which is even higher than what central banks desire.

So, why are silver and gold so disappointing? The critical issue for gold is that it is now primarily seen as protection against central banks’ imprudence. If it appears that central bankers will let a currency depreciate, it’s natural to turn to gold as a store of value. The problem is that even though central banks remain the target of many criticisms, the risk of their mistake causing runaway inflation has been considerably reduced.

Furthermore, gold doesn’t yield any returns; if you hold bullion, there are associated costs. When real yields are low, or even negative, as has been the case since the global financial crisis in 2008, the lack of gold’s yield poses fewer problems, and its price can rise. When real yields increase, as is the case today, the same logic suggests that the gold should drop, much like it did ten years ago when it became clear that inflation wasn’t taking off and interest rates could remain at or near zero. In this context, the surprise is that it has maintained its gains for so long in 2023.

Chinese investors are an excellent example of this phenomenon. Nervous about their national economy, where real estate and stock prices have fallen while their currency is weak, it makes sense for them to seek refuge in gold, even when annual inflation in mainland China is only 0.1%.

As long as real yields continue to rise, it is likely that gold will continue to fall.

Meanwhile, China has a very different impact on another asset that many associate with gold: luxury products.

This hasn’t always been the case. For most of 2023, betting on luxury products has been more advantageous than investing in broader and more popular indicators like the S&P 500. Luxury stocks were widely regarded as the European equivalent of the American tech sector due to their growth rates, which helped propel Bernard Arnault of LVMH to a fortune of $183 billion, making him the world’s richest man.

But a reversal occurred in the third quarter, intensifying towards the end of September. Over the past few weeks, the S&P Global Luxury Index, which tracks 80 of the largest publicly traded companies engaged in producing or distributing luxury products worldwide, has significantly underperformed major global stock indices. Over the past four years, investors have turned to European luxury stocks due to their strong revenue growth. But growth began to slow in the second quarter, and data from card companies suggests that American spending on luxury fashion decreased by 16% year-on-year in the third quarter.

This is the result of a combination of three factors: the reality of “higher rates for longer” is seeping into investors’ minds, and the slowdown in Chinese growth, which accounts for up to one-fifth of European luxury retailers’ sales.

In Europe, the luxury sector has been the least performing recently. But in times of economic slowdown, opportunities arise. Could this mean that the luxury slump has created a buying opportunity?
The two most significant obstacles to this scenario are rising interest rates and the slowdown in Chinese growth. However, these two headwinds could soon ease, catalysing higher growth.

Nevertheless, the sector has many strengths: high entry barriers, top-notch management teams, strong pricing power, and available cash flow.
However, patience should be exercised, and attention should be paid to the evolution of Chinese growth and real yields.