Although markets have performed well this year, some investors may be nervous about upcoming events such as the presidential election, the Fed’s next rate decision, and the state of the economy. Along with the uncertainty of the past few years, it’s no wonder that we’re seeing a 2024 gold rally as prices have risen to record levels above $2,700 per ounce.
Side Note: We typically do not have a dedicated allocation to gold within our managed client portfolios. I’m not advocating for or against an investment in gold. For various reasons, as an investment committee, we do not feel that an allocation specifically to gold is a necessary addition to an otherwise diversified portfolio. That said, I understand the allure of gold and have no problem with an investor wanting a small allocation to it. I would just caution not to go overboard on the weighting within the portfolio. This article is more for general discussion.
There are many reasons everyday investors are drawn to gold. Many look to it as a store of value, especially in inflationary periods such as the one we just experienced. Others turn to gold in times of political and global uncertainty, particularly as a hedge against fiscal deficits and loose monetary policy. It can also serve as a safeguard against market volatility when geopolitical risk is heightened, as is the case today with tensions in the Middle East.
While gold can play these roles, the stock market has historically outperformed over long periods, and bonds provide attractive characteristics such as yield and income. Understanding the relationship between gold and other asset classes is critical as markets continue to rally.
Gold and stocks can behave differently across market environments
The case for gold really depends on the portfolio objective. Across economic environments, gold can serve at least two investment purposes. First, as a precious metal with consumer and industrial uses, the value of gold can rise over time due to limited supply and steadily increasing demand. This is in addition to demand for gold as a luxury good. As a result, it can serve as a store of value when the world is uncertain and can also protect against inflation as the economy heats up or as central banks increase stimulus, as they have done this year.
It’s also clear that many investors flock to gold for safety when markets get choppy. In many ways, this is no different from how some investors view cash or bonds – as a tool to protect their portfolio from short-term market swings. Unlike cash and other safe-haven assets, however, gold does not generate any portfolio income. Thus, it’s important to distinguish between gold as a one-off investment and as a part of a portfolio tailored to achieve financial goals.
The second and more important consideration is whether gold can help diversify portfolios. Much like bonds, gold tends to perform differently to stocks. The relationship between gold and the stock market since 2008, shown in the accompanying chart, makes this clear. Although gold outperformed stocks during the global financial crisis, it fell in value and flat-lined for years while the stock market climbed to new record highs. Gold also jumped in value during the pandemic, and again more recently as the Fed began to cut rates.
What may be surprising is that gold was relatively flat during the recent inflationary period that began in 2021. This is partly because the Fed raised rates rapidly in 2022, increasing the attractiveness of cash and other short-term assets. This shows that understanding the underlying drivers of gold price movements and Fed policy is important when it comes to making portfolio decisions.
It’s also important to note that over this full period, the stock market outperformed gold, just as it has against most other asset classes. Of course, constructing a portfolio is not just about investing in the best performing asset – it’s about diversifying to create a smoother ride and to meet financial objectives. Thus, while gold may be attractive to investors for a variety of reasons, it’s always important to view it with respect to other important asset classes, including stocks and bonds.
I realize the time period above is relatively short, so below I included a long-term performance chart of the S&P 500 vs. Gold. The farthest I could go back was to 1978. And the S&P 500 is just in price return, not total return since the S&P 500 total return index does not go back that far. So the returns for the S&P 500 are muted because it’s not accounting for reinvested dividends. Obviously stocks are the winner here, but there are certainly long periods when gold has outperformed stocks.
Falling interest rates can make gold more attractive
Why have gold prices risen recently? Gold can perform well when interest rates decline, since lower rates on bonds and cash make gold, which provides no yield, more attractive on a relative basis. Specifically, the Fed tends to cut rates to spur economic growth which can be the result of an economic slowdown, and can also be viewed as inflationary. Both scenarios can be positive for gold as a store of value and hedge against rising prices.
However, it’s important to keep in mind that ongoing rate cuts tend to also be positive for stocks and bonds. Falling rates, especially if there is a “soft landing” as inflation slows, can create the ideal situation for the stock market, as it has this year. Similarly, falling rates are positive for bonds since existing bonds with higher yields become more valuable. That said, there is still uncertainty around a soft landing and market-based interest rates have actually risen in recent days, with the 10-year Treasury yield climbing back near 4.1%.
While gold has experienced a strong rally and is hovering near all-time highs, it’s important to keep its relative performance in perspective. Gold prices are now hovering around record levels, but the choppiness of gold prices over the past few years shows that while it can act as both a hedge during inflationary periods and serve as a store of value, this can reverse quickly as conditions change.
Many other assets have performed well this year
Like all asset classes, gold is perhaps most valuable as part of a diversified portfolio rather than as a standalone investment. The accompanying chart shows that many asset classes, including international stocks, small caps, and more, have contributed to the performance of broad market indices this year.
Geopolitics, the election, and other investor concerns will continue to drive markets. Rather than focus on individual asset classes, it’s more important to construct portfolios that can withstand evolving market conditions. History shows that while investor worries come and go, the principles of long-term investing remain the same.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
2024 Gold Rally
Although markets have performed well this year, some investors may be nervous about upcoming events such as the presidential election, the Fed’s next rate decision, and the state of the economy. Along with the uncertainty of the past few years, it’s no wonder that we’re seeing a 2024 gold rally as prices have risen to record levels above $2,700 per ounce.
Side Note: We typically do not have a dedicated allocation to gold within our managed client portfolios. I’m not advocating for or against an investment in gold. For various reasons, as an investment committee, we do not feel that an allocation specifically to gold is a necessary addition to an otherwise diversified portfolio. That said, I understand the allure of gold and have no problem with an investor wanting a small allocation to it. I would just caution not to go overboard on the weighting within the portfolio. This article is more for general discussion.
There are many reasons everyday investors are drawn to gold. Many look to it as a store of value, especially in inflationary periods such as the one we just experienced. Others turn to gold in times of political and global uncertainty, particularly as a hedge against fiscal deficits and loose monetary policy. It can also serve as a safeguard against market volatility when geopolitical risk is heightened, as is the case today with tensions in the Middle East.
While gold can play these roles, the stock market has historically outperformed over long periods, and bonds provide attractive characteristics such as yield and income. Understanding the relationship between gold and other asset classes is critical as markets continue to rally.
Gold and stocks can behave differently across market environments
The case for gold really depends on the portfolio objective. Across economic environments, gold can serve at least two investment purposes. First, as a precious metal with consumer and industrial uses, the value of gold can rise over time due to limited supply and steadily increasing demand. This is in addition to demand for gold as a luxury good. As a result, it can serve as a store of value when the world is uncertain and can also protect against inflation as the economy heats up or as central banks increase stimulus, as they have done this year.
It’s also clear that many investors flock to gold for safety when markets get choppy. In many ways, this is no different from how some investors view cash or bonds – as a tool to protect their portfolio from short-term market swings. Unlike cash and other safe-haven assets, however, gold does not generate any portfolio income. Thus, it’s important to distinguish between gold as a one-off investment and as a part of a portfolio tailored to achieve financial goals.
The second and more important consideration is whether gold can help diversify portfolios. Much like bonds, gold tends to perform differently to stocks. The relationship between gold and the stock market since 2008, shown in the accompanying chart, makes this clear. Although gold outperformed stocks during the global financial crisis, it fell in value and flat-lined for years while the stock market climbed to new record highs. Gold also jumped in value during the pandemic, and again more recently as the Fed began to cut rates.
What may be surprising is that gold was relatively flat during the recent inflationary period that began in 2021. This is partly because the Fed raised rates rapidly in 2022, increasing the attractiveness of cash and other short-term assets. This shows that understanding the underlying drivers of gold price movements and Fed policy is important when it comes to making portfolio decisions.
It’s also important to note that over this full period, the stock market outperformed gold, just as it has against most other asset classes. Of course, constructing a portfolio is not just about investing in the best performing asset – it’s about diversifying to create a smoother ride and to meet financial objectives. Thus, while gold may be attractive to investors for a variety of reasons, it’s always important to view it with respect to other important asset classes, including stocks and bonds.
I realize the time period above is relatively short, so below I included a long-term performance chart of the S&P 500 vs. Gold. The farthest I could go back was to 1978. And the S&P 500 is just in price return, not total return since the S&P 500 total return index does not go back that far. So the returns for the S&P 500 are muted because it’s not accounting for reinvested dividends. Obviously stocks are the winner here, but there are certainly long periods when gold has outperformed stocks.
Falling interest rates can make gold more attractive
Why have gold prices risen recently? Gold can perform well when interest rates decline, since lower rates on bonds and cash make gold, which provides no yield, more attractive on a relative basis. Specifically, the Fed tends to cut rates to spur economic growth which can be the result of an economic slowdown, and can also be viewed as inflationary. Both scenarios can be positive for gold as a store of value and hedge against rising prices.
However, it’s important to keep in mind that ongoing rate cuts tend to also be positive for stocks and bonds. Falling rates, especially if there is a “soft landing” as inflation slows, can create the ideal situation for the stock market, as it has this year. Similarly, falling rates are positive for bonds since existing bonds with higher yields become more valuable. That said, there is still uncertainty around a soft landing and market-based interest rates have actually risen in recent days, with the 10-year Treasury yield climbing back near 4.1%.
While gold has experienced a strong rally and is hovering near all-time highs, it’s important to keep its relative performance in perspective. Gold prices are now hovering around record levels, but the choppiness of gold prices over the past few years shows that while it can act as both a hedge during inflationary periods and serve as a store of value, this can reverse quickly as conditions change.
Many other assets have performed well this year
Like all asset classes, gold is perhaps most valuable as part of a diversified portfolio rather than as a standalone investment. The accompanying chart shows that many asset classes, including international stocks, small caps, and more, have contributed to the performance of broad market indices this year.
Geopolitics, the election, and other investor concerns will continue to drive markets. Rather than focus on individual asset classes, it’s more important to construct portfolios that can withstand evolving market conditions. History shows that while investor worries come and go, the principles of long-term investing remain the same.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
Recent Posts
Monthly Market Update: Reflecting on YTD Market Volatility & Recovery
Last Week on Wall Street: Markets Cheer U.S/.E.U. Trade Talks [June 2-2025]
Beyond the S&P 500: Opportunities for Diversification
Subscribe to Our Blog
Shareholder | Chief Investment Officer