Monthly Market Commentary

Considering Gold as an Asset Class

Philip Blancato, Chief Market Strategist, Advisor Group

Historically, gold has been prized by investors for its relative stability through tumultuous markets and its resilience, even outperformance, in the face of significant inflationary pressures. Being a tangible commodity in limited supply, the precious metal has intrinsic qualities shared by other real assets that have usually been better able to weather above average inflationary environments. Additionally, gold exhibits low, occasionally negative, correlation to most traditional assets like equity and fixed income, and thus provides a significant degree of diversification when markets experience volatility.

However, poor performance from the commodity this year has many market participants questioning its classification as a haven asset. “The most actively traded gold contract is on pace to decline for six consecutive months, with a loss of 14% through that period so far,”2 marking its longest losing streak since September 2018. After spiking to near all-time highs shortly after Russia’s invasion of Ukraine (along with a number of other commodities directly affected by the conflict), gold prices have fallen precipitously, and now sit down more than 8% year-to-date, on pace for their worst annual performance since 2015.2

Unsurprisingly, aggressive interest rate hikes from the Federal Reserve are causing problems for precious metal investors similar to those experienced across financial markets. Gold yields 0% and is much more aptly described as a store of value rather than a true investment expected to deliver a return other than simple price appreciation. As interest rates continue to rise with the Fed’s apparently increasing resolve to combat inflation, so too will the yields on Treasury bonds – another conventional haven asset when stock markets fall to turmoil. On a relative value basis, fixed income looks far more attractive than it had for essentially the last decade with interest rates pinned near zero. A two-year Treasury now yields north of 4%3 , offers regular income payments, and guarantees return of principal, none of which are true of gold, which could suffer price declines and potentially be worth less than the purchase price over the life of a bond.

 

Inflation does diminish the value of coupons and rising yields will force bond prices lower, but investors should still benefit from the positive real yields now afforded by Treasurys, receive income payments, and effectively ensure they do not lose money with an arguably safer, and certainly less volatile asset. The outlook for gold, on the other hand, will remain challenged at least until the Fed stops hiking interest rates. Market participants have responded by pulling money from precious metals-focused mutual funds and ETFs for 12 consecutive weeks, the longest such streak since a 13-week run of outflows that ended in May 2021.5

While gold may still be a superior option to stocks, with the S&P 500 down more than 18% this year3 , bonds, in particular Treasury bonds, are expected to outperform gold and likely deliver more downside protection at least into 2023. Barring a major recession, which could force the Fed to pause or even cut interest rates and then and push investors back to gold as a store of value when other assets collapse, the precious metal should continue to decline as rates push higher to rein in stubborn inflation.

Index Definitions

S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bloomberg US Agg Bond: The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollardenominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Disclosures

Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.

The statements provided herein are based solely on the opinions of the Advisor Group Research Team and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions of Advisor Group or its affiliates. Certain information may be based on information received from sources the Advisor Group Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of the Advisor Group Research Team only as of the date of this document and are subject to change without notice. Advisor Group has no obligation to provide updates or changes to these opinions, projections, forecasts and forward-looking statements. Advisor Group is not soliciting or recommending any action based on any information in this document.

For Existing Advisory Clients Only. Securities and investment advisory services are offered through the firms: FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., Triad Advisors, LLC, and Woodbury Financial Services, Inc., broker-dealers, registered investment advisers, and members of FINRA and SIPC. Securities are offered through Securities America, Inc. and Ladenburg Thalmann & Co., broker-dealers and members of FINRA and SIPC. Advisory services are offered through Arbor Point Advisors, LLC, Ladenburg Thalmann Asset Management, Inc., Securities America Advisors, Inc., and Triad Hybrid Solutions, LLC, registered investment advisers. Advisory programs offered by FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., and Woodbury Financial Services, Inc., are sponsored by VISION2020 Wealth Management Corp., an affiliated registered investment adviser. Advisor Group, Inc. is an affiliate of these firms. 4966949

1 https://www.wsj.com/market-data/quotes/futures/GC00
2 https://www.wsj.com/articles/this-should-have-been-a-great-year-for-gold-heres-why-it-isnt-11663526294
3 Data Obtained from Bloomberg as of 9/23/2022
4 Franklin Templeton – “Combatting Inflation with Real Assets”
5 https://www.wsj.com/articles/this-should-have-been-a-great-year-for-gold-heres-why-it-isnt-11663526294

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