Gold Shouldn’t Really Be This Strong

Gold Shouldn’t Really Be This Strong
Stéphane Renevier, CFA

2 months ago2 mins

Usually, when real interest rates (those pesky rates after accounting for inflation) jump higher, gold takes a nosedive. That’s because gold’s like that friend who doesn’t chip in for pizza: it gives no yield. So when some other investments (like bonds and money market funds) are outpacing inflation, gold becomes the less popular kid on the block. But not this year: even with real rates soaring (black line, inverted), gold’s price (red) hasn’t budged.

Three things may explain this rebel strength. First, gold is often seen as a safety net against unexpected economic and financial hiccups. And with central banks having aggressively hiked interest rates – a move that typically ruffles the financial waters – it's no surprise that investors have been grabbing onto this metallic safeguard. Second, gold, being a real asset, tends to serve as a shield against inflation, maintaining its intrinsic worth over time even when traditional currencies face potential devaluation. Third, some central banks just can’t get enough of the yellow metal. China, for one, has boosted its gold reserves for ten consecutive months, reinforcing its huge, shiny stash as it seeks to reduce its dependence on the US dollar.

Of course, the fact that gold has broken from its usual relationship with real interest rates might suggest that something is off: it’s possible that it went and got ahead of itself, and could be ripe for a correction. And with safe-haven bonds and cash-equivalent assets giving such attractive yields, it makes sense to question whether gold is the best defensive asset to own right now. But, with the financial system navigating shakier grounds, central bank decisions casting shadows over their currencies, and a recession still looming, gold remains a distinct buffer. So even if gold isn’t exactly a bargain right now, keeping some of its bling in your portfolio mix may not be a bad call. A good, cost-effective option is the abrdn Physical Gold Shares ETF (ticker: SGOL; expense ratio: 0.17%).



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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