Even those investors who don’t have any gold or shares of gold mining stocks in their portfolios may want to pay attention to the precious metal, which is approaching a record high above $2,000.
In the 1920s, economist John Maynard Keynes called the gold standard a “barbarous relic.” But even though the dollar hasn’t been tied to the price of gold for decades, price moves of the metal can still shed light on what investors, central bankers, analysts and economists are thinking about the greenback, inflation and the economy in general.
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Gold is often considered a safe-haven investment along with the U.S. dollar and Treasurys, but they all compete for that status, with currency, bonds and gold alternately outshining one another.
Sometimes, when equities experience a severe short-term drop, investors may sell gold to raise cash. Other times, such as the Federal Reserve’s recent aggressive interest rate hikes, non-interest-bearing gold becomes less attractive.
But Treasury yields have been on the decline since March, as investors have sought the safety of government bonds even as the dollar has lost value against a basket of major world currencies.
This flight to safety — based on less-than-desirable economic data and concerns about the global banking industry — is also giving gold substantial tailwinds.
“An attractive backdrop for gold oftentimes implies more negatives than positives in the overall macro outlook.” — Craig Giventer, managing director of portfolio strategies at investment advisor GYL Financial Synergies
Lower Treasury yields make the metal more attractive. A lower dollar boosts demand for gold from those holding other currencies. Inflationary worries, stemming in part from higher oil prices after a production cut announcement from OPEC
and its allies, are also in the mix.
But crucially, it’s the worry among investors that the economy could enter a recession that is behind gold’s rise, as that increases the likelihood of a slowdown in rate hikes and also stokes desire for gold as a safe haven.
Here are some factors to consider as you weigh the price of gold as an economic indicator and what that means for your stock portfolio:
— Recession worries as a driver of higher gold prices.
— How should stock market investors position themselves?
— Drawbacks of investing in gold now.
[READ: How to Invest in Rare-Earth Stocks.]
Recession Worries as a Driver of Higher Gold Prices
“An attractive backdrop for gold oftentimes implies more negatives than positives in the overall macro outlook,” says Craig Giventer, managing director of portfolio strategies at investment advisor GYL Financial Synergies. “A litany of incrementally negative developments since Jan. 1, such as inflation still running higher than the Fed’s comfort level; stress in the U.S. and European banking sectors; ongoing geopolitical tension and armed conflict; an increasing probability of the U.S. entering recession in the 2023/2024 period; and, to top it all off, the historical indictment of a former U.S. president, have all created a favorable environment for the safe-haven asset of gold.”
On April 13, the price of gold for immediate delivery topped $2,046, its highest point since March 2022 and within spitting distance of its all-time high just above $2,070 in 2020. “Fears of recession, the recent cap on oil production and significant turmoil in the banking sector are key drivers behind this,” says Joseph Cavatoni, market strategist with the World Gold Council, an industry group.
“We’re seeing investor behaviors that we tend to (see) in times of distress and recession. We see people turning to things like gold and Treasurys, and that’s something that people do when they’re a lot more concerned about what’s going on in the economy.” — Michael Wagner, chief operating officer, Omnia Family Wealth
Jonathan Rose, CEO of precious metals investment firm Genesis Gold Group, forecasts that gold could go as high as $2,250 by the end of this year as stubbornly high inflation slows economic growth and tips the economy into a recession. He also cites worries about the U.S. debt ceiling
, supply chain issues and faltering confidence in the real estate market.
“We’re seeing investor behaviors that we tend to (see) in times of distress and recession,” says Michael Wagner, chief operating officer with Florida-based investment advisor Omnia Family Wealth, which holds gold in client portfolios. “We see people turning to things like gold and Treasurys, and that’s something that people do when they’re a lot more concerned about what’s going on in the economy.”
[READ: Should You Invest in Silver as an Inflation Hedge?]
How Should Stock Market Investors Position Themselves?
While diversification is important within a portfolio, with stocks Giventer is leaning toward defensive companies with low debt that have good returns on capital, strong relative growth prospects and pricing power.
Defensive stocks are less tied to economic cycles than so-called cyclical equities. Investors often buy defensive plays because they think a recession is coming in an attempt to preserve the value of their portfolios and still earn a steady return.
Defensive stocks often come from market sectors where consumers and businesses will still purchase products and services regardless of what the economy is doing. This includes sectors like health care, utilities and consumer staples.
Even though many market participants expect a U.S. recession late in 2023, there is little agreement on the depth and duration of it, says Amelia Bourdeau, market strategist for Diamond Standard, a diamond commodities company that tracks gold prices alongside the performance of the precious stones. For the moment, U.S. equities have held up relatively well despite the economic uncertainty because earnings outlooks have not been meaningfully revised lower, she says.
Still, market and U.S. economic outlook uncertainty is continuing, meaning U.S. equity trading will likely remain choppy, she says.
“It would be prudent to position for a recession or growth slowdown through holding health care and consumer staples,” she says.
Beyond equities, investors can consider putting money into gold in a variety of ways. One popular way is by owning physical gold in the form of bars, coins or jewelry. Investors who want exposure to physical gold without the hassle of storing and insuring it can consider physically backed gold exchange-traded funds, which have shares tied to gold stored in bank vaults.
Investors can also explore gold futures and options, but these investments are often best left to the pros. Of course, investors can also buy stocks or ETFs of gold mining companies.
Drawbacks of Investing in Gold Now
Still, there are downsides to gold that investors should consider.
Robert Johnson, finance professor at Creighton University, goes so far as to recommend never considering gold as an investment if you have a long time horizon because the precious metal has underperformed stocks over the long term.
“While having a small position in precious metals may dampen portfolio volatility in the short run, the trade-off between slightly dampened volatility and the lost long-term return is certainly not a prudent one,” Johnson says.
Also, keep in mind that trying to time the market by making big changes in a portfolio is a risky endeavor.
“Many people have been preparing for a recession for years and have exited the stock market,” Johnson says. “The opportunity cost of such a strategy is quite high. Instead, people should invest in a low-fee, diversified equity index fund and continue to invest consistently whether the market is up, down or sideways.”
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The Higher Price of Gold Reflects Recession Worries originally appeared on usnews.com
