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Wealth Management

Gold’s Time to Shine?

Jun 22, 2023

Gold has long been viewed as a ‘safe haven’ for investors in a slowing economy. Now may be a good time to add it to your portfolio.

Author
Christopher K. Baxter
Christopher K. Baxter

Key Takeaways

  • Gold has historically acted as a hedge against inflation by rising in value when the purchasing power of the U.S. dollar wanes.
  • It may also act as a buffer against stock market volatility during economic slowdowns.
  • A weaker dollar, potentially lower interest rates and central bank buying could support higher gold prices through year-end.

Investors have long considered gold as a safe haven that can help diversify their portfolios and weather turbulence in the economy and markets. One of the world’s oldest forms of currency, the precious metal has historically acted as a hedge against inflation by rising in value when the U.S. dollar’s purchasing power wanes.

 

In addition, gold is largely uncorrelated to U.S. equities, meaning its value doesn’t typically follow the same ups and downs, potentially making it useful for investors during times of economic stress. In fact, in six of the eight U.S. recessions since 1973, gold outperformed the S&P 500 Index.

 

With the price of gold near an all-time high, there are three key reasons to consider investing now:  

  1. 1
    A weaker U.S. dollar is generally good for the price of gold

    Historically, gold and the U.S. dollar have shown an inverse relationship to one another: When the dollar’s value declines relative to other currencies, the price of gold tends to increase, and vice versa. There is strong potential for a weaker dollar in the second half of 2023, which could drive demand and higher prices for gold. In fact, in the last 40 years, gold has delivered the best six-month returns when the dollar has fallen from elevated levels.

  2. 2
    Declining interest rates could drive up the price of gold

    Gold is considered a “long-duration” asset, meaning it may be especially sensitive to changes in interest rates. For example, over the past 25 years, the price of gold has risen about 10% for every percentage point of decline in the inflation-adjusted, or “real,” interest rate of the benchmark 10-year U.S. Treasury bond. That’s noteworthy for investors today because the Federal Reserve, after rapidly increasing rates to tame decades-high inflation, may eventually start cutting them, potentially sending the price of gold higher. 

  3. 3
    Central banks are buying gold at a rapid pace

    In 2022, central banks bought gold at the fastest pace since 1967, at about 1,136 tonnes.1 This year, central bank purchases hit 228 tons in the first quarter,2 breaking the first-quarter record previously set in 2013—and there is little indication that the pace will slow. There are a few key reasons for such heavy central-bank demand:

     

    • Gold may be a way to hedge the inflation that many countries continue to experience.
    • Some countries are looking to diversify away from major currencies like the U.S. dollar, euro, Japanese yen and British pound.
    • Developing countries’ central banks remain under-allocated to gold relative to their developed-market peers.

While gold’s prospects depend heavily on the direction of the U.S. dollar and interest rates, its traditional role as a safe-haven asset during difficult economic times and as a hedge against slowing growth, along with potential long-term support from central bank buying, may signify its growing importance in an investment portfolio as part of a risk-management strategy.

 

To learn more, ask your Morgan Stanley Financial Advisor for a copy of the May 17 Global Investment Office report, Global Insights: What Will Drive Gold From Here?  Your Financial Advisor can help you assess tactical opportunities to invest in the precious metal as well as how your portfolio may benefit long-term from exposure to gold. 

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Footnotes:

1 Source: https://www.weforum.org/agenda/2023/03/heres-how-central-banks-have-used-gold-in-the-last-30-years/. Note: Tonne is a metric measurement and is equivalent to 1,000 kilograms.

2 Source: https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q1-2023/Central-banks

Index Definitions

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. Bonds are subject to interest rate risk, call risk, reinvestment risk, liquidity risk, and credit risk of the issuer.

High yield bonds (bonds rated below investment grade) may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk, price volatility, and limited liquidity in the secondary market. High yield bonds should comprise only a limited portion of a balanced portfolio.

Companies paying dividends can reduce or cut payouts at any time.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Investing in small- to medium-sized companies entails special risks, such as limited product lines, markets and financial resources, and greater volatility than securities of larger, more established companies.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

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