Key Takeaways
- While gold has proven to be a somewhat unreliable short-term hedge, Russ reiterates that it continues to be an effective store of value over the long-term, particularly in today’s rocky environment of geopolitical uncertainty.
- Importantly, as U.S. debt-to-GDP ratio grows, gold has historically reacted in a non-linear fashion, with gold prices increasing as the U.S. debt pile grows.
While stocks have staged a remarkable and rapid recovery from the April lows, on a year-to-date basis U.S. equities are flat. On a global basis, returns are a bit better. Exceptionally strong European markets have led global indices to a 5% year-to-date gain. However, both domestic and international equity returns are paltry next to the performance of gold.
Although off the recent highs, year-to-date gold is still up roughly 25%. While I would not extrapolate those returns into the back-half of the year, I would continue to hold a small position in gold as a portfolio diversifier.
I last discussed gold back in January. At the time I suggested that while gold is an unreliable short-term hedge, it is an effective store of value. This characteristic is particularly important today, as investors wrestle with both record government debt and wrenching changes in international trade. The fact that the dollar is also under significant pressure, only adds to the argument.
Higher uncertainty leads to higher volatility
Back in January, investors were unprepared for the magnitude and breadth of the announced tariffs. While many have subsequently been delayed and the economic impact, thus far, has been muted, policy uncertainty remains unusually high.
Historically, when investors are confused and uncertain as to government policy, equity volatility tends to be elevated. During periods of heightened volatility, gold generally outperforms stocks, as it has year-to-date.
Longer-term there is a more pressing problem: huge and growing piles of government debt. While investors have focused on the U.S. fiscal situation, other countries, notably Italy and Japan, have also pushed public debt well above gross domestic product (GDP) (see Chart 1).
The growing public debt of the U.S. government is of particular concern. Given the size of U.S. debt markets and the dollar’s reserve currency status, gold prices have historically had a strong relationship with the level of U.S. public debt. As U.S. debt-to-GDP grows, gold typically follows. More importantly, in the past the relationship between gold and government debt has been non-linear. In other words, gold price gains have tended to accelerate as public debt has approached and now surpassed 100% of GDP.
Gold as a long-term holding
As I discussed back in January, investors should not expect gold to act as a hedge on a day-to-day basis. If anything, on a given day or week gold has recently been trading in the same direction as stocks. That said, the value of gold is not as a short-term hedge but as a long-term insurance policy. While the yellow metal has already had a stellar run, looking further out, heightened policy uncertainty and record debt levels suggest keeping some tucked away in your portfolio.
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The Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure (excluding any applicable sales charges) that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
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Russ Koesterich, CFA, is a Portfolio Manager for BlackRock's Global Allocation Fund and Lead Portfolio Manager for BlackRock’s Global Allocation (GA) Selects Model Portfolios and is a regular contributor to Market Insights.
Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
Commodities' prices may be highly volatile. Prices may be affected by various economic, financial, social and political factors, which may be unpredictable and may have a significant impact on the prices of precious metals. Concentrated investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and the general securities market. A significant portion of the aggregate world gold holdings is owned by governments, central banks and related institutions. One or more of these institutions could sell in amounts large enough to cause a decline in world gold prices. Should there be an increase in the level of hedge activity of gold producing companies, it could cause a decline in world gold prices. Should the speculative community take a negative view towards gold, it could cause a decline in world gold prices.
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