Caveats to Gold’s Recent Climb

Have you heard? Gold is flirting with a new record high! With stocks still about -12.7% below their January 2022 peak, gold’s run seems to be attracting a lot of eyeballs, with some claiming there are more gains to come on top of those already notched.^[i] Zoom out a bit, though, and it is clear gold actually hasn’t delivered much to cheer about.

Here is the thing: That record gold is near eclipsing is its August 6, 2020 price, $2067.15.^[ii] This means gold is basically flat over the past two years and eight months. During this stretch, we have endured the highest inflation rate in 40 years. A regional conflict involving a nuclear power that many feared would upend global commodity markets. Global recession fears. Bank failures. A bear market in stocks. A bear market in bonds. All of the things that gold proponents usually argue make gold boom. And have made it boom, at times, during this spell—see early 2022, late 2022 and the past few weeks. But the intervening busts also canceled those out, creating the flat stretch for gold bugs.

Despite enduring an equity bear market, stocks have more to show during this stretch. Even with 2022’s bear market, the S&P 500 has returned 27.7% since gold’s last peak, including dividends.^[iii] The MSCI World Index is close behind at 23.4%.^[iv] Gold has done better than stocks cumulatively since the S&P 500 and MSCI World hit their respective prior bull market highs on January 3 and January 4, 2022. But it boomed and busted multiple times during this stretch, making it the antithesis of a low-volatility “safe haven.” Ideally, the asset where you seek shelter during a bear market shouldn’t require extreme fortitude to stay in. That sort of defeats the purpose.

But it is always most important to look forward. As of now, it looks increasingly likely that stocks are in a new bull market. More downside is possible, but markets deal in probabilities, not possibility or certainty. As we wrote Monday, the marriage of extreme widespread pessimism and economic data that, while not great, are overall beating expectations, is emblematic of a young bull market’s backdrop. This suggests that if the low isn’t behind us already, it is very close by, which should render any excitement about gold hitting new all-time highs even more off base.

For all its allure and popular reputation, gold is just a commodity. A shiny one, yes, but nonetheless a commodity with minimal industrial uses. Accordingly, its main driver is sentiment, which is why its long-term returns have been concentrated in short, intermittent stretches. Stocks, however, are ownership stakes in a growing economy and corporate profits. So if we are near the beginning of a new bull market, what is more logical? To own the asset class tied most closely to global growth and technological advancement? Or the one that swings wildly, often for no discernible reason? Would you prefer the one that rose in over 80% of rolling 12-month periods since 1974 … or the one that rose in 57%?^[v] The former is stocks—the latter, gold.

Beyond this, consider: Even most of the mythical reasons to own gold are fading into the rearview. We don’t think gold is a great inflation hedge when you look at the entirety of its and US consumer prices’ history. But even if you disagree, last year’s inflation has begun fading and likely keeps doing so, if weak money supply and lower input costs are any indication. Stocks and bonds are up from their bear market lows. The conflict in Ukraine looks well contained geographically. And bank contagion fears are passing. Meanwhile, the reasons to own stocks—future economic and earnings growth amid an overall quiet legislative backdrop—are all forward-looking.

When in doubt, we think it is best to think like markets, especially if you find yourself getting sucked into exciting narratives like gold’s new high. Take a deep breath. Look forward, like stocks do, to the next 3 – 30 months. Consider your long-term goals and the returns you need to meet them. Think back to why you invested in the first place. Stocks haven’t changed since then … and neither has fickle, emotional gold.