FREE NEWSLETTER
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.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
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.