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IT’S BEEN QUITE A YEAR for gold investors. While the stock market has struggled, gold hit a new all-time high, topping $3,500 per ounce just a few weeks ago. Year-to-date, gold has gained nearly 30%, while the S&P 500 is in negative territory. This has certainly grabbed people’s attention—but does gold make sense for your portfolio?
To answer this question, let’s start by looking at the arguments favoring gold. Supporters typically point to two key attributes, both of which have contributed to its rise this year. First, gold has a reputation as being an effective inflation fighter. Second, it’s viewed as a safe haven during times of economic uncertainty.
Gold’s reputation as a bulwark against inflation stems mainly from the 1970s. Decades prior to that, the exchange rate between gold and the U.S. dollar had been fixed at $35 an ounce under an agreement known as the Bretton Woods system. But that system became untenable, and in the early 1970s gold prices were allowed to float freely. What happened next cemented gold’s reputation.
In less than a decade, gold jumped nearly 20-fold, from $35 to $650. This jump coincided with a period of unusually high U.S. inflation, which at one point hit nearly 14%. Many investors concluded that gold and inflation must be linked. Because the 1970s were also a period of stock market malaise, the decade ended with gold looking like an ideal investment.
While the 1970s were an exceptional period for gold, enthusiasts point to a much longer history. When archeologists excavated tombs from ancient Mesopotamia, they found gold jewelry, including headdresses, bracelets and earrings, dating back some 5,000 years. They found the same thing in the tombs of Egyptian pharaohs. (Tutankhamun’s mask contained more than 20 pounds of gold.)
In other words, gold is arguably the world’s oldest store of value in continuous use, and that, too, has contributed to its unique reputation.
A reason for its longevity is perhaps that gold, unlike traditional paper money, isn’t under the control of any government, helping to preserve its value. By contrast, it’s easy for governments to issue new currency, which has the effect of debasing the value of existing money in circulation, including consumers’ paychecks and savings. We witnessed that during the pandemic. To support the economy, the Federal Reserve created approximately $3 trillion, much of which Congress distributed in the form of stimulus checks. This was a key contributor to the inflation spike we saw in 2022.
Unlike paper currency, which can be created at the whim of any government, the supply of gold grows very slowly due to the cost and effort involved in mining. Indeed, the World Gold Council estimates that if all of the gold ever mined were fashioned into a single cube, it would measure just 72 feet on each side.
To illustrate the stability of gold, fans cite the notion that an ounce of gold has always translated—more or less—to the cost of a men’s suit. They argue that this rule of thumb has held true at least since the Roman empire. Does the data really support this? It’s debatable. True or not, stories like this contribute to gold’s reputation.
Gold’s longevity, scarcity and independence from government control help explain why it’s earned its unique status as a safe haven during periods of uncertainty, which is the second key benefit cited by gold supporters.
We’ve seen that dynamic this year. The White House’s new tariff policies have upended global trading patterns, and that’s impacted the stock market, as would be expected. But because of the resulting economic uncertainty, the value of U.S. Treasury bonds has also been affected. In the midst of all this, gold has become relatively more attractive to investors looking for an alternative to stocks and bonds. That explains a large part of gold’s recent rise.
The gains this year have been particularly impressive, but gold has generally moved to the beat of its own drum, which contributes to its appeal as a way for investors to diversify. In statistical terms, on a scale where zero indicates no correlation and 1 indicates perfect correlation, gold’s correlation to stocks has been quite low, averaging just 0.24 over the past 10 years.
Thus, gold seems uniquely appealing. Still, I don’t recommend it. Why? Despite its reputation, gold hasn’t always been a reliable hedge against inflation. It certainly did well in the 1970s. But aside from that, gold hasn’t always delivered. Even in 2021 and 2022, when inflation was high, gold investors didn’t do terribly well. And when inflation began to subside, gold gave up whatever gains it had achieved.
In a 2022 interview, a hedge fund manager described the frustration for gold investors. “It’s been a horrible experience,” he said. “You have high inflation, the Fed behind the curve, and gold going down rather than up…. It’s enormously disappointing.”
Why didn’t gold deliver more for investors in 2022, when inflation hit a 40-year high? In my view, it’s because gold lacks intrinsic value. That is, it doesn’t produce income. That’s in contrast to other investments like stocks, which produce dividends; bonds, which deliver interest; and real estate, which provides rent. Because gold doesn’t produce any income, its price is driven largely—if not mostly—by emotion.
There is no math that an investor can do to determine an appropriate price for gold. It’s worth only what other investors are willing to pay for it, and that, in my view, is why its price can fluctuate so widely. Gold gains in value when the economic environment seems uncertain. But when the bad news passes, its value as a safe haven suddenly becomes less valuable, cancelling out its prior gains. That’s why a long-term chart of gold prices looks a lot like a rollercoaster, lacking the same overall upward momentum as the stock market. For that reason, I would be wary of buying gold—except as jewelry.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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I tend to stick to the idea that “if gold is high it’s a bad time to buy.” I personally don’t buy any food because the ETFs are a PITA with distributions, and owning physical gold is just plain inconvenient. But if I did buy gold, I would do it when everything is feeling really good in the world, and then hope it all goes to ground 😂
Reading a lot of knee-jerk reactions and not much thought in the responses to Adam’s article. It’s clear by their thumbs up/down reactions that a majority of HD readers won’t consider gold.
It seems there are generally two trains of thought when it comes to gold. First, those who believe in the USD (or other fiat currencies) and that generating income on that is the source of wealth and income. Second, those who don’t trust fiat currencies and wish to hold other stores of value such as gold. Over history, the value of fiat currencies trends toward zero in all cases. So that implies an investor must keep the currency working to offset inflation (or currency valuation loss).
There’s no doubt that most times stocks do a good job of that. But there are times such as the Great Depression and 1970s when they don’t do well, and real assets have their day. That said, I have come to the conclusion (beginning in 2006) that an allocation to gold (and other real assets) is preferable. I’m a hedger by nature and I can see the scenarios (such as this year) when gold has its day while equities may struggle. Building that allocation when gold is relatively high is difficult and probably not advisable. But when gold is relatively low is when many dis it and wouldn’t consider buying.
Here is one statistical analysis of how much gold is appropriate in an allocation: https://www.incrementum.li/en/journal/the-optimal-gold-allocation-how-much-gold-does-your-portfolio-need/
I’m sure that’s too much for this readership but something folks might consider.
I will both agree with the author of the article and Chris Roessler’s analysis. I own gold and silver and would not be without it BUT why I bought it and why I now hold it have changed. I bought it when I was really without much background in investing convinced the world was falling apart and the dollar was DOOMED! Thank goodness I continued to study and learn. Gold is NOT an investment IMO. It is a straight up insurance policy to the failings of all fiat currencies. I hold a good amount portfolio-wise but haven’t bought in maybe 10 years as I have decided its an asset to just be tucked away never to be used and to be passed to my heirs. Used only in case of emergency. Right now, I suspect that gold will pull back for a while if Trump’s economic success is realized. I would prefer it that way. If gold takes off in price, its more of an indication of the failing value of the dollar than of its own value increasing. I call it the barometer to the value of the dollar. I will be very happy to see it slowly rise (in line with inflation, imagine that!) as it means the economy is ok and a high gold price will mean economic pain IMO. The only caveat to this is if gold somehow returns as a neutral reserve asset and the price must be revalued to be effective here. This is a long shot but Luke Groman makes an interesting argument for it on the May 8th edition of the Palisades Gold Radio podcast. Worth a listen to hear what some in the investment industry are thinking.
I bought gold in 1980 and, thanks to the recent surge, it kept up with inflation. Had I not been so dumb, and invested in Jack Bogle‘s S&P 500 index fund, instead of making a zero real return, I’d have made nearly $1 million.
Forgot to post this great new article by Campbell Harvey on gold. It’s easily the most balanced and informative piece yet and makes it clear both why gold can be a valuable diversifier in small doses AND why most of us are better off not owning any apart from in jewelry.
https://www.researchaffiliates.com/content/dam/ra/publications/pdf/1079-gold-5000.pdf
Actually, one argument I’ve been hearing in favor of gold recently is that it DOES have intrinsic value because you can make stuff out of it and do a lot with it.
It is Mothers’ Day and I miss my mom. She loved owning gold. I do not. I want to sell her coins and guess now is as good a time as any. There is complexity, and calculating the taxes makes my head hurt. Another reason to not own bullion. I love the simplicity of stocks and bonds.
If I understand correctly that your mother has passed, then her bullion would have gotten a step up in cost basis when she did. So the taxes shouldn’t be that difficult to calculate. Of course I realize there may be a lot here I don’t know.
I think there is a place in a portfolio for commodities, specifically precious metals and energy products. However, precious metals have a long cycle, in my experience. Holding them may mean a loss as compared to inflation or the S&P 500.
For example, I purchased some GLD in 2010 at $118 and I could have bought more GLD during a runup in 2011 at $178 a share. I did not. After that GLD languished and took until March 2024 for it to reach $200 a share. It is only in recent months that it has outperformed.
In place of GLD I decided to own a precious metals mining fund and some XLE. Why? For one thing they spin off dividends. Thanks to the dividends I’ve made some money, no matter the price of gold or oil.
Even with the recent runup GLD has only gained about 33% since 2011. Over that period the S&P 500 (VOO) has gained 211%.
The S&P may not be a fair comparison because 10 stocks dominate the 505 and comprise 34% of the holdings. Those 10 stocks show a recent 1-year average return of 21.4% for each. Yes, in the last year GLD did better than these stocks. (I use GLD as a surrogate for physical gold).
Some of the things that are said about gold could just as easily be stated about meme stocks. Both have future value often based upon extraordinary growth projections. But what are meme stocks a hedge against? Yet, they are owned and may do extraordinarily well for a few years.
I’ve noticed long cycles in popular forms of investing. Stocks may be in the range of 15-20 years, which is why I concluded that holding for 5 years may be insufficient. I do hold, but not forever and against a company criterion.
Here’s a site which lists the largest 20 companies in the S&P year by year since 1989. I chose 2007. The changes have been significant and that is my point about the S&P.
https://www.finhacker.cz/top-20-sp-500-companies-by-market-cap/#2007
Norman – a quick check indicates GLD has essentially doubled from $150ish in mid 2011 to a bit over $300 today – up about 100% since 2011, not 33%.
When comparing asset performance, for commodities, small caps, international equities etc in so many of our HD discussions, we all have to be careful of the period selection. Gold was indeed peaking in late 2011 and 2012 followed by flatlining as Norman points out, yet Langston’s charts for the the last 5, 10 and 20 years actually shows gold slightly beating the S&P thanks mostly due to the recent hot run up.
I’m not a gold bug and don’t think of gold in any way as a substitute for equities. But unlike so many of the very adamant naysayers, I can see a rational for those who like having a small allocation since gold is somewhat uncorrelated with equities. This increases diversification, smooths volatility, and provides a hedge against uncertain times. Having said this, I would not be buying gold at recent peaks of over $3000 per ounce, rather it is likely a good time to cash out a portion.
BTW, to beat the 28% collectable tax, gold is best held in tax-deferred accounts where any gains will be taxed at ordinary income tax rates which will be lower for most. For after tax holdings, Adam is correct that gold is best as jewelry which is definitely a “BUY and HOLD forever” purchase, especially on this Mother’s Day. Happy Mom’s Day to all.
I agree. No gold. And no cryptocurrency either
Gold is an investment in pessimism. This kind of pessimism results from variation in the markets amplified by the voices of those with the most to lose from change. It is my opinion that if you step off the bandwagon and look objectively, gold will become of little interest as an investment.
Gold vs. S&P500. Click on 5, 10, 20, 30 years in addition to the initial presentation.
While you’ve written this with the best of intentions you don’t really understand how gold works when deployed in a portfolio, while trotting out the familiar (and incorrect) clichés about it not being an inflation hedge, having no intrinsic value, etc. Meanwhile portfolios that contain a judicious (5-20%) slice of gold deployed strategically in combination with other assets continue to offer risk-adjusted returns that trounce plain vanilla stock:bond allocations as they have for decades.
I should also say right upfront that I personally HATE owning gold not only because it’s a PITA to deal with and is wildly volatile and unpredictable< but also because of the crowd it often draws (I don’t own a bunker filled with ammo and MRE’s, for example). But as a diversifier to protect against sequence-of-returns-risk and guard against the deep, long-lasting drawdowns that are a retiree’s worst enemy it has no rivals. Case in point: my Golden Butterfly portfolio is up almost 4% YTD and its worst drawdown has been 0.4% – in keeping with its record of having the highest risk-adjusted returns and lowest and shallowest drawdowns of any lazy portfolio for over 50 years.
This article explains the basics and serves as a necessary corrective to your post:
https://portfoliocharts.com/2020/08/21/metal-money-and-the-measurable-value-of-gold/
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Gold provides asset diversification and a bit of an alternative insurance holding as a hedge. Thus, having a small gold allocation is not such a bad approach. Gold is also easily bought via ETF’s such as GLD which we’ve owned for about a decade.
Even though I’m OK with an allocation to gold, I’m also “wary of buying gold” today, but for a different reason. Since gold is in a super up-cycle, this is more likely the time to sell a portion of gold holdings rather than a time to add gold holdings – just from a standard portfolio rebalancing standpoint.
Holding a small amount of gold typically enhances and returns reduces overall portfolio volatility.
Basel 3 reclassifies gold as a Tier 1 reserve asset. Central bank buying has been a big driver of gold demand in recent years as they implement the new capital requirements and diversify out of the US dollar.
I don’t see any problem with individual investors, like central banks, diversifying some of their reserves into gold, but I suspect many will be tempted to go all-in because of recent momentum. Return-chasing is one of the biggest reasons that investors underperform.
If not having “intrinsic value” is a reason to steer clear, then you might consider gold mining equities instead. The increase in gold prices has increased margins and cash flow, and many of these companies are still quite cheap.
Adam, your last paragraph sounds exactly why digital assets have no inherit value. Some day the whole system will come crashing down when investors wake up to the fact that the emperor wears no clothes, or it’s all a con job like the Wizard of Oz, and they won’t even be holding the bag as digital assets only exist in the ether.
My portfolio of cash, bonds and gold mining stocks is up 9% YTD. I’m a deep value investor and several years ago, the only stocks that were stupid cheap were the gold miners trading mostly with single digit PEs. I bought individual stocks with the following characteristics:
Today, many mining companies have an all in sustainable cost of $1,100 to $1,600 per ounce of gold. In January of 2024, gold was priced at $2,050 and today trades at $3,300 which generates huge gross margins and free cash flow which is just starting to hit balance sheets. My gold mining stocks are all up 100% and 3 are up over 200% and are only 14% of my portfolio. Time to sell? Not yet, maybe when Mr. Grossman starts to add GDX to client portfolios. No disrespect intended, just an indicator of retail discovery and possible mania.
I’m not a fan of gold at all. I’m very disappointed when some of my favorite talk radio hosts get on the air and give their best snake oil pitch for gold.
Bitcoin is a digital gold but with the additional attributes of being easily veritable, decentralized, and very early in its adoption cycle. It is a harder asset with a known inflation rate and a capped supply. Gold’s market cap $22 trillion. Bitcoin’s market cap $2 trillion with under 2 million addresses holding more than $100,000 worth of bitcoin. If you don’t hold any Bitcoin, you should.
Bitcoin could disappear in an instant. What if a brilliant methematician, programmer, or AI cracks the math to interrupt blockchain? Or the owner of your local internet cuts you off or started charging fees for all bitcoin traffic? Or international traffic is throttled? Or quantum computers become a reality and can crack the code? Ot there is a massive electrical grid shutdown? And what if people simply refuse to use it for day-to-day transactions? Bitcoin is weak and fragile.
I put $3k in bitcoin, a tiny drop of my portfolio. It’s a fun gamble. Now it’s worth $6k. Maybe someday my kids will be wealthy from it or maybe I’ll lose $3k. But to believe in it? Maybe, but unlikely long term. I don’t recommend it as a real investment.
Gold, on the other hand, is a real physical object and has been an obsession of world cultures for as long as we have a historical record.
Gold is “harder” than an asset that only exists on a digital ledger. It has actual utility, in jewelry and industrial applications.
Just curious. How much as a percentage of investible assets do you think folks should hold in Bitcoin?
I wouldn’t go higher than .05-1% of my portfolio.
I agree.