Transcript:
So, it's that time. It's that time that we have to talk about gold, and with gold prices recently reaching a record of $2,600 per ounce, more than likely I'm going to begin getting questions from clients and prospective clients about my thoughts on gold. Now, gold has recently increased in significant value due to economic uncertainty, the potential for rate cuts, and the increasing geopolitical tensions we see in the Middle East, and elsewhere around the world.
While gold can serve as a store of value and hedge against inflation, its performance should be viewed in context with other asset classes like stocks and bonds. It may be surprising to some, but stocks have outperformed gold over the past two decades across many different macroeconomic environments. That said, there are many reasons investors are drawn to gold, and if you are one, I'd encourage you to listen closely to this video.
It's usually during times of uncertainty that gold gains attention or captures the interest of certain investors. Ultimately, if investors wish to purchase gold, they should consider it as part of their diversified portfolio strategy. It's essential to look at how it fits within the big picture of their financial situation rather than just as a standalone investment.
Let's explore this further.
First, this chart shows the S&P 500 total returns and gold returns re-indexed to the cycle peak back in 2007. This chart illustrates the role gold can play in balancing risk during times of uncertainty, but as you can see, stocks tend to outperform in other economic environments.
The ideal scenario for gold, which is hard to time, usually occurs when the Fed is loosening policy during financial and economic crises. Gold performed well immediately following the 2008 financial crisis and again during the pandemic in 2020. However, it's interesting to note that gold did not perform well during the recent inflationary period since the Fed raised rates rapidly, which favored assets such as cash and short-term bonds. It's also important to note from this graph that there was an extended period when gold traded below its all-time highs.
Additionally, if you're considering adding gold to your portfolio, keep in mind that gold doesn't generate portfolio income. Depending on how you're holding it—whether physically or through an ETF—there are unique risks associated with holding gold physically. It's essential to understand this because it makes gold different compared to stocks or bonds, which do provide income.
Another thing to remember is that if you choose to add gold to a diversified portfolio, you need to be prepared for extended periods of underperformance relative to other asset classes. In the previous chart, we saw a period from 2012 through 2019 where gold traded below its all-time highs.
If we go further back in history, we see that in the mid-to-late 1970s and early 80s, gold performed well against equities. However, from October 1980 to April 2007, gold traded below its all-time high, set in the fall of 1980. This is a 26-year period during which the asset traded below its all-time high.
Next, this chart tracks the performance of gold alongside the 10-year Treasury and German 10-year Bund yields. It shows that gold prices tend to move in the opposite direction of interest rates. Gold prices have risen in response to recent federal rate cuts and have performed well compared to other defensive assets like short-term bonds.
That said, interest rates have actually risen recently, with the 10-year Treasury yield jumping above 4%. While gold is near all-time highs, stocks and bonds can also benefit from falling rates, especially in a soft-landing scenario. If rates are falling but the economy is still strong, stocks can perform well even as gold and other assets rally.
Finally, this chart shows the annual total returns of various asset classes, highlighting the importance of diversifying across a variety of investment types to weather market volatility. Various asset classes, including international stocks and small caps, have contributed to broad market performance this year. This may be a surprise to many investors who worried about a recession or market collapse less than a year ago.
With events such as the presidential election and the next Fed rate decision coming up, it's important to maintain broad exposure to different asset classes. If you choose to hold gold, its value is best realized as part of a diversified portfolio rather than as a standalone investment. Gold’s rise can be attributed to Fed rate cuts, geopolitical tensions, and general investor concern. However, it's important to focus on constructing portfolios that can withstand evolving market conditions and focus on the long term.
I hope you find these high-level insights helpful, and if you would like to discuss further, please don't hesitate to reach out. I look forward to speaking with you.
Have something on your mind?
Pursuit Planning and Investments, LLC (“PPI”) is a registered investment advisor offering advisory services in the State of Oregon, Indiana, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Past results do not guarantee future results. Please contact us at 971-803-5948 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from PPI with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, www.planyourpursuit.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.
This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.
The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Pursuit Planning and Investments, LLC (referred to as “PPI”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
All opinions and estimates constitute PPI’s judgement as of the date of this communication and are subject to change without notice. PPI does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall PPI be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if PPI or a PPI authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.