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.
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3 Data Obtained from Bloomberg as of 9/23/2022
4 Franklin Templeton – “Combatting Inflation with Real Assets”