As investors seek returns outside equity and credit markets, certain commodities have shone. Gold’s rally has been driven by its perpetual characterization as a “safe-haven” asset, similar to money market mutual funds, or even Swiss debt. Gold prices are frequently driven by investor sentiment - not so much the actual supply and demand of the precious metal itself. Exchange-traded funds tracking gold assets have seen record inflows of funds from investors seeking to protect their portfolios against dramatic volatility and potential inflation stemming from recent monetary and fiscal policy measures in the United States. Furthermore, investors are failing to find returns in traditional safe-haven assets like Treasuries in domestic and international markets as interest rates approach (and enter) negative territory.
The spot price of gold per ounce at the start of 2020 hovered around $1,530. Gold’s spot price on July 24th, 2020 reached $1,902, for a year-to-date return of 24.3%, excluding trading fees and commissions. Compare this with the S&P 500’s YTD return of a loss of 1.3%, the NASDAQ’s 14.0% YTD return, and the Russell 2000’s 12.0% YTD decline - gold has proven to be an attractive investment so far in 2020. But as with any particularly speculative asset, investors must ask themselves: How much higher can it go?
Gold’s historic rise these past few months have stemmed from investors’ changing outlooks regarding both financial markets and macroeconomic variables such as interest rates and projected stimulus packages. What begins as a hedge in a portfolio may quickly become a speculative gamble on the continued rally of the yellow metal. A quick economic recovery driving a sustained growth in capital markets could quickly melt any chance at a continued surge in gold’s price. Coupled with the probability, albeit currently miniscule, that domestic (or international) interest rates rise as a result of an economic recovery, funds may flow out of gold ETFs and futures as quickly as they poured in over the last few months.
Investors must continue to be wary about groupthink and the idea that they must “get in before it’s too late”. Assets designed to act as portfolio insurance should act accordingly - mitigating risk, not driving outsize returns.