Key takeaways
- Historically, higher real rates and a strong U.S. dollar have served as headwinds for gold.
- Recently the price of gold has continued to advance despite these factors with support stemming from central bank purchases and growing U.S. deficits.
- In this environment, gold is less likely to act as a hedge to equities but rather as a long-term store of value.
Gold continues to work. Year-to-date, the precious metal is up 3%, beating stocks. On a one-year basis, gold has gained more than 30%, making it one of the best performing asset classes (see Chart 1).
Chart 1
Asset Performance - Last 12 Months
I last discussed gold back in October. At the time, I suggested gold’s role in a portfolio was not as an inflation hedge, but as a store of value at a time of excessive and still growing government deficits. This represented a changing dynamic, with gold no longer as sensitive to changes in key economic variables, such as the U.S. dollar or inflation-adjusted interest rates.
Since then, gold has continued to climb, up roughly 7%. Gold’s continued advance has occurred despite both the dollar and U.S. interest rates spiking higher. Since late September the dollar (DXY Index) has risen by nearly 10%, while long-term rates have climbed by almost a full percentage point. The fact that neither trend has disrupted gold’s performance speaks to the changing rationale for holding the metal, with central bank demand and U.S. deficits serving as support.
China keeps buying & deficits keep growing
Back in October, one supporting factor I highlighted was increased buying from China’s and other central banks. Based on data from Bloomberg at that time, China’s central bank gold holdings were roughly 45% higher than in the summer of 2022. That trend continues, with holdings increasing by approximately 4% in Q4 of last year.
One of the reasons China is buying more gold is that they are buying fewer U.S. Treasuries. While much of the shift can be attributed to geopolitical considerations and concerns over U.S. sanctions, nagging questions regarding U.S. fiscal sustainability are a growing consideration, not just for the Chinese but also for domestic investors.
There are still many questions regarding the new administration’s fiscal plans, however the potential extension of the 2017 tax cuts suggests deficits are unlikely to go down, and in the short-term may increase. This is the second factor supporting gold: an ever-growing supply of debt driven by a deteriorating U.S. fiscal position. To the extent investors remain focused on when and how the U.S.’s debt problem resolves itself, gold likely remains in demand as a diversifying asset.
Just don’t expect a day-to-day hedge
One reason not to hold gold is as a short-term hedge against a falling stock market. Recently, gold has been more likely to trade in the same direction as equities. During the past year, the correlation between gold and U.S. equities has been approximately 0.25, indicating that the price of gold and U.S. stocks have a propensity to rise and fall together. For investors, the implication is that, at least in the short-term, gold is not an effective way to protect your equity gains. However, as a store of value for the long-term, gold continues to make a lot of sense.
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Russ Koesterich, CFA, JD
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team and the lead portfolio manager of the GA Selects Model Portfolios.
Mr. Koesterich's service with BlackRock dates back to 2005, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. He joined the BlackRock Global Allocation team in 2016 as Head of Asset Allocation and was named a portfolio manager of the fund in 2017. Previously, he was BlackRock's Global Chief Investment Strategist and Chairman of the Investment Committee for the Model Portfolio Solutions business, and formerly served as the Global Head of Investment Strategy for scientific active equities and as senior portfolio manager in the US Market Neutral Group. Prior to joining BGI, Mr. Koesterich was the Chief North American Strategist at State Street Bank and Trust. He began his investment career at Instinet Research Partners where he occupied several positions in research, including Director of Investment Strategy for both U.S. and European research, and Equity Analyst. He is a frequent contributor to financials news media.
Mr. Koesterich earned a BA in history from Brandeis University, a JD from Boston College and an MBA from Columbia University. He is a CFA® Charterholder.
Russ Koesterich, CFA, is a Portfolio Manager for BlackRock's Global Allocation Fund and Lead Portfolio Manager for BlackRock’s Global Allocation (GA) Selects Model Portfolios and is a regular contributor to Market Insights.
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