Gold is a safe haven in times of economic turmoil and uncertainty. Gold is a hard asset and a hard currency, and its price has historically been uncorrelated with the stock market, making it an advantageous investment during market volatility. And although the international monetary system is no longer based on the gold standard, all central banks still understand the intrinsic value of gold as a reserve asset. In fact, central banks have been buying gold ever since the Great Financial Crisis in 2008. In our view, gold is undervalued and under-owned and represents the ultimate form of crisis insurance.
Let’s talk through whether or not you should change your investment strategy and invest in gold.
Is gold a good investment in the short term?
The price of gold is generally inversely related to the value of the dollar — which has been very strong of late. In 2022, the gold price was flat (-0.2%), although gold significantly outperformed both stocks and bonds. Moreover, across a basket of global currencies, gold appreciated by an average of 7.2% in 2022.
While the dollar remains strong, this strength could very well be the dollar’s undoing, as foreign countries may be forced to sell dollar-denominated assets (such as Treasury bonds) in order to strengthen their own currencies. Also, with a recession looming, we would expect that economic weakness would push the Federal Reserve to stop tightening monetary policy, which would likely cause the dollar to decline and gold to appreciate.
Geopolitical development should also create additional demand for gold. As a result of the financial sanctions that the West has placed on Russia, freezing their government bond accounts held in Western banks, foreign central banks accelerated their gold purchasing activity in 2022, and some countries like Ghana have begun purchasing oil with gold rather than U.S. dollars.
For these reasons, gold is our favorite asset class in 2023.
Is gold a good investment in the long term?
In general, gold is considered a store of value, and we believe the long-term outlook for gold is quite favorable. With bonds correlating strongly with stocks, the volatility reduction benefit of adding gold to a diversified portfolio has never been greater. Historically, the price of gold doesn’t typically move in tandem with stock market prices.
Moreover, during historical periods when inflation is accelerating, gold tends to outperform stocks. For example, during the inflationary 1970s, stocks generated a -2% real return annually while gold generated a +21% real return annually. In addition, negative real interest rates are bullish for gold. We expect inflation to remain high and real interest rates to remain negative over the next five to seven years, which should be a very favorable environment for a rising gold price.
What to know if you want to invest in gold
At the present moment, we believe gold should represent a meaningful allocation in investor portfolios. Gold was one of the best-performing asset classes during the inflationary decade of the 1970s, and we believe it is similarly our favorite asset class for the current investing environment.
That said, it’s important that you pick your gold vehicle carefully, as we believe some gold vehicles are excellent while other gold vehicles are quite flawed. For example, we are not impressed with the most popular gold ETF, the SPDR Gold Shares ETF (GLD).
We also believe that investors should own an allocation to gold mining stocks since mining companies can generate leverage on rising gold spot prices and are also somewhat uncorrelated to stock indices. That said, gold mining companies are riskier than just owning gold bullion stored in a vault.
In short, gold is a safe haven asset and a hedge against currency depreciation — we expect that adding an allocation of gold to your portfolio would be a good investment strategy during market volatility. It works as a store of value and tends to outperform when inflation is high and interest rates are low. The fundamentals of gold suggest that an investment in gold may earn an attractive risk-adjusted return over time. Check out the information on our website to learn more about investing in gold or contact one of our financial experts today.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this article and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future.