Exploring Gold as a Tactical Investment Option

Gold is ancient, but its longevity hasn’t fostered similarities with other asset classes. In fact, that’s one of bullion’s primary selling points: it’s usually not very correlated to stocks and bonds.

That confirms the yellow metal’s status as an alternative asset class, but it gold is also a store of value despite the fact that it doesn’t produce cash flow, dividends or interest payments. Even without those amenities, gold is in the midst of an impressive bull market, indicating it’s an appropriate time for advisors to perhaps bring up the subject to clients. After all, the SPDR Gold Shares (NYSEARCA: GLD) is higher by almost 10% over the past year.

Regarding the current gold bull market, it’s the third in recent memory, but this could be unique in that more retail investors are likely to get in the game, potentially boosting prices in the process.

“The first two (2004-2011; 2015-2020) saw big inflows to gold ETFs. But households have missed this rally: total ETF gold holdings, a proxy for investor demand, have fallen by 25%, implying a price around $1600-1700,” according to Bank of America research.

Gold’s Correlation Benefits

One reason ordinary investors and clients may be increasingly interested in bullion is that they know some of their allocations might be too traditional. Gold can ameliorate that scenario.

“Given its low correlation with other asset classes, such as stocks and bonds, gold can provide an important role in portfolios: diversification. Gold’s ability to act as a ‘store of value’ can help mitigate risk during times of market volatility and economic uncertainty,” according to Morgan Stanley. “It may be able to serve as a hedge against inflation. In addition, gold historically has exhibited an inverse relationship to the U.S. dollar, meaning as the dollar weakens, gold prices tend to rise.”

In terms of reduced correlations to traditional assets, gold is one of the best options –an assertion cemented by decades of supporting data.

“It is a great hedge for stocks. Gold has the lowest correlation to the S&P 500 of almost any asset class and can act as a haven if inflation reaccelerates or growth slows later this year,” notes Bank of America.

Gold as a Hedge

One of gold’s primary long-term uses has been as a hedge against economic contraction and equity market volatility. That status remains true today and it could be evaluating at a time when stocks continue making all-time highs.

“Some investors may feel they should reduce their allocation to equities if the odds of a U.S. recession rise, but as previously mentioned, investing in gold may be an approach to consider,” concludes Morgan Stanley. “Historically, gold prices tend to rise when bond yields, adjusted for inflation, fall. Conversely, a stronger dollar and rising yields, driven by improved global growth, would likely limit gold’s upside.”

Translation: Gold, even in modest allocations, could provide some ballast for equity-heavy portfolios and it’s offering upside as markets price in the possibility of lower interest rates.

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