Looking at: The Rush for Gold

Estimated reading time: 4 minutes

Shine On

Gold might be called one of the world’s oldest assets. When it comes to investing in gold, it might also be called the oldest trick in the book, an old-fashioned idea, or even… boring. I once had a boss who pondered, “what are people going to do with a bunch of shiny stuff in the basement?” referring to those who were hoarding gold bullion. 

Fair question, bricks of gold are cumbersome to store. 

Over history, the numbers would support this “old fashioned” stance. Since 1968, average annual returns on gold are only 7.9%, while the S&P 500 has returned an average of 10.5% including dividends. From that perspective, gold appears to be a less risky and lower return asset than U.S. stocks. 

But as “boring” as gold may seem, it has actually outperformed the S&P 500 on a year-to-date, 1-year, and 3-year basis. In this market cycle, it pays to be boring.

Gold is also typically treated as a defensive asset, with investors expecting it to do well during recessions or times of heightened economic stress. There have been spurts of economic stress over the past three years (e.g. the Russian invasion of Ukraine in 2022, the regional U.S. banking crisis in 2023, the Japanese Yen carry trade unwind in 2024), and gold responded positively to those events, as expected.

But there have also been extended periods of low market volatility and solid economic results when gold would traditionally be expected to take a backseat – yet it soared. 

Despite market commentary being dominated by large-cap tech topics most of the time, there have been other less obvious places to make money in this market.

The Rally that No One Owns

We’ll be the first to admit, it can be endlessly frustrating to watch assets we don’t own rally strongly. We’ve certainly experienced that over the last three years, especially during periods when concentrated groups of stocks have led markets higher.

Luckily, we’ve been constructive on gold for a couple years and it has worked well. But interestingly, not entirely for the reasons we expected. We did expect global currency volatility to be a factor, and it has been. We also expected more investors would start buying gold not only because of currency volatility, but also because of a slowdown in the global economy. The latter part has not been the case – the economy has yet to see a major slowdown, and the average investor has not bought gold.

The chart below shows the rise in the price of gold (yellow) and the total known gold ETF holdings (blue). Recently, the two have moved in opposite directions, meaning the accessible ways to own gold as individual investors have not seen inflows commensurate with the rise in the price of gold.

So who owns it? Mainly central banks, and according to this chart, the People’s Bank of China (PBOC) has been one of the biggest recent buyers.

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