Gold is attracting much attention as it is trading at its highest level since August 2011. In the summer of 2011, gold spiked on the uncertainty surrounding the U.S. Debt Ceiling Crisis as the possibilities increased that the U.S. Treasury could default, or delay, debt payments to bondholders. Today, the global economic uncertainty from Covid-19, historically low-interest rates, and the Federal Reserve (Fed) flooding the economy with liquidity could be a catalyst for even higher gold prices. The Fed’s actions are keeping interest rates low and putting downside pressure on the U.S. Dollar – historically gold is inversely correlated to interest rates and the U.S. Dollar.

Price of Gold vs. 10 Year U.S. Treasury Yield (July 2006 – June 2020)

Performance of Gold vs. 10 Year U.S. Treasury (July 2006 – June 2020)

Data comparing Gold and 10 year U.S. Treasury Yield (symbol: TNX) – Gold increased from 2006 to 2013 while yields (TNX) fell. Both moved sideways from 2014 to late 2018 when gold started rallying and yields plummeted to current levels.
Source: Stockcharts.com

G&S Perspective:

Investors have often used bonds to diversify portfolio risk, but at the current interest rate level bonds do not offer the same level of risk diversification since the upside capital appreciation potential is insufficient. With the TNX yielding 0.68%, a drop to 0% would only offer 6% upside appreciation. Investors could look for gold to diversify a stock portfolio instead of relying on bonds. With gold touching on several dissimilar areas of the economy, it may make sense for investors who have concerns over geopolitical issues, the volatile energy market, and the constant threat of terrorism.

The below chart illustrates the correlation between gold and the S&P 500 (symbol: SPX) is not consistent. From August to November 2019, the two moved inversely of each other. In another example, starting in March 2019 both started moving together.

Performance of Gold vs. S&P 500 (July 1, 2019 – June 29, 2020)

Source: Stockcharts.com

“Gold is money, everything else is credit.”

― J.P. Morgan,
testifying to U.S. Congress in 1912

At G&S Capital, we build dynamic portfolios and risk management strategies for each of our clients. Our client projects are led by knowledgeable, dedicated financial planners and supported by the G&S Capital team of specialists to provide personalized portfolios, unparalleled service, and independent advice