Anthony Bradshaw
Gold prices are surging to record levels amid a complex global economic backdrop, including potential U.S. Federal Reserve rate cuts and ongoing geopolitical risks.
With its low correlation to equities and ability to help mitigate recessionary and inflationary pressures, gold’s attractiveness is underscored by robust demand from emerging market central banks – allowing it to shine as a potential diversifier within multi-asset portfolios.
Gold price and correlation to equities
Gold price in US$ per ounce, Rolling 52-week correlation, 2000–present
Source: Bloomberg, Principal Asset Management. Data as of April 19, 2024.
Recently, gold prices reached all-time highs despite a rally in risk assets, higher bond yields, and a stronger U.S. dollar. A few factors of the current environment are making the historically stable asset a particularly useful diversifier within portfolios:
- Equities display lower correlation to gold than to U.S. Treasurys. With equities potentially challenged in the near term by increasingly hawkish U.S. Federal Reserve (Fed) forecasts, growth concerns, and inflation risks, these correlations may allow for stronger portfolio diversification benefits.
- Gold should benefit from eventual Fed interest rate cuts. While Treasurys may also outperform, gold is better positioned to mitigate a future U.S. recession or geopolitical risks. Unlike gold’s finite supply, the supply of Treasurys can increase substantially if expansive fiscal policies are pursued during recession. Additionally, if geopolitical events fan further inflation worries, Treasurys would likely suffer while gold would benefit.
- Although the probability of the U.S. economy entering stagflation remains low, a broad-based resurgence in inflation, coupled with slowing business investment and consumer spending would support gold prices.
Structurally, gold prices have been supported by strong demand from emerging market central banks as they diversify their FX reserves – this de-dollarization trend is likely to continue.
Gold is shining, and investors should take note of its relative attractiveness, which still has further upside potential, and its advantages as a more stable portfolio diversifier.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
