All That Glitters

Now that the first month is behind us, and we have 11 more to keep us busy, I think now is as good a time as any to talk about the elephant in the room: Gold.

Yes, we’re in the business of stocks over here at MFAM, but when have you known me to miss an opportunity to discuss greater macroeconomic concepts? The truth is, gold and silver have been on quite a tear recently, and I’m willing to bet at least some of you are curious as to what that’s all about.

This month, we’ll have a short chat about these shiny cousins, why some investors choose to add them to a portfolio, and why their prominence in headlines and outperformance isn’t quite so periodic.

Balancing with bullion

Gold belongs to the Real Assets Class of investments, along with commodities like oil, raw materials, and other precious metals. Because of the nature of storage costs and the relatively high absolute cost of purchasing and storing gold bars outright, many investors might choose exchange-traded products to gain exposure to changes in the price per ounce. Whether you own bars or an ETF, gold can be a diversifier. That’s because, historically, the metal has had a low-to-negative correlation with both stocks and bonds.¹ Some also believe it can also serve as a “safe haven,” a mechanism for liquidity in times of severe geopolitical stress or currency devaluation.

So what’s a good amount of gold to own? Well, my friends, I’m afraid you’ll have to chat up your local CFP on that one! This is, however, where the balancing act really comes into play. As an active investor, I’m putting most of my chips into thoughtful choices plucked out of the equity markets. My overall risk tolerance is directly related to my life stage, so any gold in my own portfolio could look very different from yours! The purpose is to manage some volatility without dragging down or diluting returns during strong equity markets. But that’s me. Your risk-reward equation may look very different.

Hedging against a molten economy

You might have also heard a neighbor, colleague, or pundit refer to these nuggets as “inflation hedges.” This is quite a specific use case.

Among the differences between gold and fiat currencies—like the Dollar, Yen, and Euro— is the speed at which the supply can grow. Gold is mined and refined, meaning the supply grows at an annual rate of just under 2%. Conversely, the money supply can grow rapidly because of economic policies like quantitative easing. When expansion of the money supply outpaces economic growth, purchasing power erodes. The limited nature of gold supply should insulate the asset from the same sort of dilution that currency experiences. And when the economy runs hot and there’s too much money floating around, it’s not unusual to see gold in the headlines.

On the flip side of that coin, there’s the interest rate element. When real interest rates (r ≈ nominal interest rate – inflation) are negative, some investors flock to gold to preserve their purchasing power. Because it’s globally recognized as a finite and indestructible store of value that cannot be debased, some investors find that it “pays” to park funds in gold until the economic lava flow subsides.

Who takes home the silver?

Over the last five years, gold tended to outperform during significant equity drawdowns, though its upside capture was less predictable.²

For the sake of this example, “stocks”, “equities”, or “equity markets” as used here shall represent the S&P 500 Total Return. In 2021, gold wildly underperformed a seemingly unstoppable equity market that was coasting on post-COVID bounce back. In ’22, as interest rates ticked up and stocks were wobbly to the high teens downside, gold was off less than a percent. In ’23, gold had a low teens year, but didn’t come close to equities that were led by the AI frenzy kicking off. By 2024, gold returned to the top step, and in ’25, equities were a runner-up again as concerns around valuation and geopolitics ran through markets.³

I cannot stress enough how much my conclusion is not to exchange all my equity holdings for gold when volatility rises. If anything, it’s to reiterate how different equities and gold really are. Security vs. store of value. Ownership of a company vs. ownership of a real asset. The list goes on and on. So, while your morning headlines are starting to look like a treasure chest, remember that active investing already seeks to do much of the work of growing your pile and preserving your purchasing power. Eyes on the prize!

Until next time,

Shelby