Don’t Fall Victim to Gold’s Recent Shine

Gold is glittering. After paralleling stocks’ 20%+ gains last year, prices for the shiny metal have jumped another 11.4% year-to-date, reaching record highs and outpacing global stocks.^[i] Pundits have responded swiftly and predictably, claiming the run’s supposed drivers—geopolitical uncertainty, tariffs, inflation and Fed moves—will keep gold shining throughout 2025. But these arguments play into popular myths about gold—in our view, it is still just a commodity, failing to fill virtually any of the roles many give it.

Pundits are hyping gold’s rise, but we have seen this movie before. Per usual, many cite the fears du jour as reason to buy bullion. Their suggestions? Gold is a safe haven for those fearing tariffs, a hedge against “stubborn” inflation and an opportunity to benefit when the Fed cuts and/or global central banks start snatching up more gold.

Yet these just restate the various investment cases people have long made for gold, which aren’t true. Let us start with the “safe haven” claim. Loads of bearish pundits seem to suggest gold is a hedge from tariffs, presuming two things: One, that tariffs are likely to drive a bear market and two, that gold hedges against stock market downturns. Neither is correct, in our view. On the former, we have expressed our doubts before—today’s tariffs lack the scale and surprise to sink stocks.

If the latter were true, gold and stocks would carry a strong negative correlation—meaning when stocks fall, gold prices rise by about as much. A correlation of 1.00 means they move in lockstep and -1.00 exactly opposite, with zero meaning no relationship. Since 2000, gold and US stocks’ correlation is about 0.05—showing for all the times they moved opposite, they moved together about as much.^[ii] Not much to go on there. More to the point, gold fell alongside stocks during large swaths of bear markets in 2022, 2020 and 2008. This isn’t what an effective hedge ought to do, in our view.

“Inflation hedge” labels are also off base. Exhibit 1 helps shows this, charting gold prices against US CPI since 1974. When the line is rising, gold prices are rising faster than consumer prices—and vice versa when it is falling. An ideal inflation hedge should tend to rise faster than inflation, especially when the latter heats up. But gold fell alongside accelerating inflation in 2022, with the rebound that extends to this day beginning as the inflation rate peaked and started cooling. Even before this, in various inflation eras, gold was an unreliable “hedge.” Heck, gold prices fell as inflation heated from February 1987’s 1.5% y/y to December 1990’s 6.3%. Same thing in the late 1990s. The early 2000s’ gold price boom came with tepid to low inflation. Ditto for the early 2010s, but gold prices plummeted thereafter as inflation persisted at about the same rates.

Exhibit 1: Gold’s Spotty Record Against Inflation

Source: FactSet and St. Louis Fed, as of 2/25/2025. Month-end gold price and consumer price index level, December 1973 – December 2024.

Don’t try to time gold purchases around Fed rate cuts or central bank purchases, either. For one, gold prices rose during just three of the last six cutting cycles since 1990.^[iii] The Fed’s cutting doesn’t guarantee shiny returns. Plus, central banks were net gold sellers from 2000 – 2010, when bullion prices tripled, and they were net buyers during gold’s mostly sideways run from 2011 – 2020.^[iv] They just aren’t great market timers (few are, in fairness) and arguably aren’t even trying to ride gold prices up.

Ultimately, gold is just a commodity. It doesn’t generate earnings, pay dividends or follow the economic cycle. Plus, supply is slow-moving—it can take 10 – 20 years to bring new supply online after finding a deposit—and there are very few physical demand sources.^[v] Gold has little industrial use, and again, central banks’ transactions don’t augur prices. These days, most physical demand is for jewelry. Thus, gold prices move mostly on broad sentiment swings in the short term, which years of experience tell us are basically impossible to predict.

In our view, gold is pretty inferior at delivering on the claims commonly bandied about today. Need long-term growth and a better chance at beating inflation in the long run? We think stocks are king, even with the stretches where falling markets and higher inflation coincided, like 2022. Since 1974, when all vestiges of the gold standard were done, US stocks’ 12.4% long-term average annualized return wallops gold’s 5.6%, which barely outpaces CPI’s average 3.7%.^[vi] With less volatility, too: Gold’s one-year standard deviation—the degree of fluctuation around the average annual return—of 23.9% tops US stocks’ 16.2%.^[vii] Gold has lower returns with more short-term wiggles.

Hence, gold won’t dampen short-term volatility well either. In our view, bonds—not gold—are best. As we covered last August, bonds’ standard deviation is much lower. Simply put, gold’s volatility and return characteristics undercut many alleged reasons to own it.