For most Millennial investors out there, holding gold in your portfolio sounds like something you heard your grandpa say was a good idea or something you give a glance at when the media decides to talk about it.
Despite gold’s reputation for being a bit stodgy and boring, the shrewd investor is aware of its inherent value, which is mostly derived from the inverse relationship it’s been known to have with the US Dollar.
This is a longstanding, popularized idea amongst most of the financial industry, but lately, we’re starting to see some decoherence between the two, meaning that gold may not be the inflationary safe haven that it used to be.
The nature of gold
Gold inherently has an inverse relationship with the USD, because metals are dollar-denominated globally. This means that when other countries or foreign investors wish to buy gold, they have to essentially exchange dollars for it, thus driving the value of the dollar down.
Most nation’s central banks like to buy gold reserves, and the more they hold, the more they drive down the value of the dollar while also indicating what their outlook is on the future (at varying time intervals) of the USD.
On top of the intrinsic functionalities of our international exchange system and how gold literally drives the value of the dollar, it’s also picked up the socialized identity as being the inflation hedge, or the thing to buy when everything’s going to hell, which only further reinforces its place in this role.
Gold’s numbers over time
Gold is an afterthought for those seeking any kind of ROI in the near term, but, the data shows us it’s cyclical.
- Last decade: The Wilshire US Large-Cap Index’s returned 280% vs. gold's 23%
- But wait, from May 2001 to May 2011: The Wilshire US Large-Cap Index returned 45% vs. gold’s 453%
- And from 1991 to 2001: The index yielded 309%, while gold netted a -23% loss.
Gold right now
Gold has returned about 7% over the last year, 49% over the last 5 years, and a deceptive 540% over the last 20 considering its lengthy dip. Gold is trading at about the same price now as it was in 2012, around $1,800. It experienced a significant lull, about a 50% drop to the bottom in 2016 after a strong climb from 2005 to 2011.
For comparison, Vanguard’s total market index, $VTSAX, as well as $SPY quadrupled in that same 20-year time frame, while $DIA returned 3x since 2011.
Gold ETF holdings are also declining steadily as we see some reactionary inflation fears nudge the yields on treasury bonds higher, further incentivizing investors to go the bond route over gold.
What all this data means
Although gold has traditionally been viewed as having a negative relationship to the equities market, it’s not currently providing much more than an effective net zero correlation.
As the economy also continues to open up, inflation fears regress to the mean, and the US Dollar returns to relative normal strength in the near term, which could put further downward pressure on the demand for gold, making its use case as a shorter-term inflationary hedge questionable.
Gold has its place, and certainly still does have its value as an inflationary hedge, but it’s mostly an asset to be held over decades or centuries, not years or months. So, as we always say, diversify your portfolio according to your own plan, risk tolerance, and financial future.
📚 Take Finny's lesson on investing in gold if you need an intro or a refresh on this topic: