One insightful perspective on the recent surge in gold prices is likening it to schadenfreude. The precious metal tends to thrive when other assets falter and global uncertainties abound.
Consequently, experts advise potential buyers to exercise caution. William Bernstein, the author of “The Four Pillars of Investing,” suggests adopting a mindset where one hopes their investment doesn’t yield significant returns. “You buy gold and hope it doesn’t go up,” he remarks.
Earlier this week, the April gold contract saw a substantial increase of $30.60, or 1.46%, settling at $2,126.30 per ounce, marking its highest level since its inception in 1974. By Wednesday, the metal was trading at $2,158.40. This surge in the safe-haven asset comes amidst ongoing conflicts in Ukraine and Gaza, anticipation surrounding the presidential election, and uncertainty regarding interest rates and inflation.
Russian President Vladimir Putin’s recent warnings of potential nuclear conflict and dire consequences for civilization if other nations intervened in Ukraine have heightened tensions. Moreover, concerns persist that a reelected Donald Trump might withdraw the U.S. from NATO, escalating security risks globally.
Noteworthy historical instances where gold thrived include the Great Recession and the onset of the COVID-19 pandemic. Some analysts on Wall Street foresee the current rally persisting, with expectations of gold’s value climbing to $2,300 or beyond over the next 12 to 16 months.
Should investors consider embracing this doomsday hedge? Financial experts offer varying perspectives. Despite occasional surges, experts argue that gold’s long-term returns pale in comparison to stocks and bonds.
“When volatility strikes, investors often believe that allocating their funds to gold is a safer bet,” observes Doug Boneparth, a certified financial planner and the founder of Bone Fide Wealth in New York, who also serves on CNBC’s Advisor Council. However, Boneparth notes, “Gold hasn’t consistently preserved its value as people had hoped.”
Historical data reveals that over the past century, gold has yielded an average annual return of just around 1%.
For instance, consider an investment made a decade ago on March 5, 2014. A $10,000 investment in the S&P 500 at that time would now be valued at approximately $32,700. In contrast, an equivalent investment in gold over the same period would have only grown to roughly $14,700, according to data from Morningstar Direct.
In contrast, exchange-traded funds (ETFs) such as SPDR Gold Shares and iShares Gold Trust have delivered an average annual return of nearly 4% since 2014, compared to approximately 13% by the S&P 500, as per data from Morningstar Direct. Consequently, Boneparth remarks, “Gold doesn’t really feature prominently in our client portfolios.”
Consider gold as insurance
Bernstein suggests viewing the purchase of gold as akin to buying home insurance. The precious metal tends to perform well when other financial assets falter, particularly during times of dwindling confidence in banks and currency.
“When everything else is in decline, gold often shines,” he explains. “It’s akin to how home insurance sees a significant return when faced with a fire.”
Just as homeowners pay for the protection offered by insurance, owning gold also incurs a cost, Bernstein notes. This cost manifests in the form of modest returns during stable economic periods.
Nevertheless, some investors might opt to allocate a small portion of their portfolio to gold—experts typically recommend keeping it below 5%—as a safeguard against potential economic upheaval, Bernstein suggests.
