While investors have endured stomach-jolting ups and downs since the coronavirus pandemic struck, one of the world’s oldest commodities has been on a steady rise: gold.
The price of gold broke an all-time record earlier this week, trading just shy of $2,000 per ounce. Gold outperformed all major asset classes in the first half of 2020, rising 27% in value since the new year, according to data from the World Gold Council.
“Gold has fascinated humankind for thousands of years,” says Austin Pickle, an investment research analyst for Wells Fargo Investment Institute. “It is impervious to air and water, and nearly every ounce that has ever been mined still sits above ground today.”
Here’s what to know about gold bullion’s bull run.
Gold is considered a safe-haven investment
When gold prices boom, that’s often a sign investors are worried about economic gloom. Gold prices this week topped a previous intraday trading record of $1,895 per ounce set in September 2011, when global markets were still reeling from the impacts of the Great Recession and Europe was struggling to contain a eurozone debt crisis.
Similarly, gold’s price gallop this year was spurred by the coronavirus pandemic and the economic uncertainty that’s followed.
“Gold is often considered a strong hedge against the possibility of inflation, as the rising cost of goods and services threatens to weaken the value of the currency,” says Spencer Campbell, director of SE Asia Consulting, which advises precious-metal mining companies. “Gold tends to hold its value in real terms over a long period of time.”
But not every retail investor needs to buy gold as a hedge against economic uncertainty. There are several things to consider when deciding whether to invest in gold.
When the U.S. dollar drops, gold prices rise
Another factor that can affect gold prices: When the value of the U.S. dollar weakens, gold strengthens.
The value of the U.S. dollar fell to a two-year low this week amid growing spikes in COVID-19 cases in the U.S., further pushing up gold prices.
“Generally speaking, gold has always had an inverse relationship with the U.S. dollar, and with the recent U.S. dollar sell-off, the demand for gold has gone higher and higher,” says Drew Rathgeber, senior futures broker with Daniels Trading in Chicago. “This inverse relationship has been around since the U.S. government took us off the gold standard.”
U.S. dollars were tied to a specified amount of gold for domestic dollar use until 1933, after the Great Depression helped spur a shortage in gold, and the U.S. ended international convertibility of dollars into gold in 1971.
Adjusted for inflation, real gold record was 40 years ago
While Monday’s record made headlines, when considering inflation, gold prices still haven’t beat the price set Jan. 21, 1980, when prices closed at $850 an ounce. In today’s dollars, that would be about $2,800 an ounce, according to the World Gold Council.
That also raises a concern, experts warn, about having too much gold in your portfolio: It doesn’t have the growth potential of stocks, nor does it produce any income while holding the asset (unlike dividend stocks or bonds).
In contrast, on Jan. 21, 1980, $850 would have been more than enough to purchase seven shares in an S&P 500 index fund, and those seven shares this week would be worth more than $22,000.
Can’t afford physical gold? There’s a fund for that
If you can’t afford to buy an ounce of gold (let alone figure out how to store and secure the asset), there is a more affordable way to diversify your portfolio with some exposure to gold: purchasing gold exchange-traded funds.
Along with bullion’s rise, a record number of investors have purchased gold ETFs this year, with $47.8 billion inflows as of July 27, according to World Gold Council data released July 30.
“Historically, physical gold has been very difficult to trade due to the transportation, insurance and storage charges investors incur,” says Charles Self, chief investment officer of iSectors, an ETF advisory. “These ETFs own actual gold bars stored in secured vaults in major banking centers throughout the world. Investors in these securities can trade the ETFs on major stock exchanges just like company stocks.”
Gold isn’t the only hedge against market turmoil
To hedge against market volatility in equity prices, investors look to assets that don’t mirror stock market moves — so while the market is going down, at least some of your portfolio is moving up to offset losses.
“In the past, bonds were the primary diversifier to a stock portfolio,” Self says. “Given the low interest rates available from bonds and the possibility that interest rates will rise, which will reduce the value of bonds, another asset class should also be utilized to provide diversification.
“Since precious metal prices are uncorrelated with stock and bond prices … precious metals is the additional diversifier of choice,” he adds.
Other investments that traditionally don’t track stock moves include real estate investments — although commercial real estate has especially suffered during the coronavirus shutdowns.
“In times of inflation, gold is the go-to hedge, but others suggest non-oil commodities such as coffee, orange juice and soybeans, for example,” adds Campbell. “Plus there are real estate plays and Treasury Inflation-Protected Securities, or TIPS.
“But for those, you should speak to a financial adviser before investing or balancing your portfolio, as everyone’s situation differs,” Campbell suggests.