What Place Does Gold Have in Today’s Market?

Volatility is surging back into the equities market with a vengeance. Morgan Stanley recently reported that in the first quarter of this year the S&P 500 moved at least 1% on twenty-three different trading days compared to just eight days throughout all of 2017. Increasing interest rates, fears of a trade war, and an undercurrent of geopolitical concerns are all driving this activity. Lately, gold bullion investors are asking “what’s my place in these turbulent markets?” The answer can be found with a look at history.

 

CFA Russ Koesterich, writing for BlackRock explains that “historically gold has outperformed equities by an even larger magnitude when volatility is rising from an already elevated level.” The research illustrates a compelling picture for bullion investors. Russ continues, “From 1994 to the present using Bloomberg data, during months when the VIX was already above 20 and rose even further, gold outperformed by an average of nearly 5%, beating the S&P 500 roughly 75% of the time.” These findings make intuitive sense; as volatility rises, so do investors’ trepidations about the future. These concerns, in turn, lead those same investors to seek “haven” assets, namely precious metals.

These concerns, however, are not spurred by volatility stemming from politics and shifting trade dynamics alone. Interest rates have always played a significant role. For example, consider that there were eight years between 1974 and 2008 in which U.S. inflation was more than 5%. In these periods, gold increased in value by 14.9% in real times. As a result, gold outperformed stocks, bonds, and other commodities.

Even over a more recent time horizon of March 1997 to May 2009, gold outperformed several other haven investments. Gold generated an annualized real return of 5.9% while the S&P Commodities Index (GSPI), real estate investment trusts (REITs), and US Treasury Inflation-Protected Securities Index (TIPS) each yielded a lesser annualized real return of -0.2%, -3.8%, and 3.7% respectively. Moreover, volatility was higher for all these other asset classes during the period excluding TIPS.

What do these numbers mean for today’s investor? They illustrate the value of gold as a portfolio hedge not only in times of rising rates or even in times characterized by fears of rising rates. These findings remind us that gold has a place in an investor’s portfolio even when rates are low and expected to remain low.

However, the current economic climate portends a different scenario; rates are on the rise and will continue to climb making gold an even more attractive investment.

These rising rates are just another step in the Fed’s long journey from their days of substantial quantitative easing which echoes the tumultuous years of the great recession. In such an environment gold continues to be an effective diversifier without the volatility which incites anxiety.

Too often we think of an investment in gold as a replacement for equities. Many investors shy away from the asset fearing the opportunity cost associated with equities rise especially over the last several years. In truth, gold offers not only a respectable return; it offers protective features other assets cannot. With more rate increases on the horizon, the time to act is now.