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Gold's Essential Role In A Diversified Portfolio

Derek Wolfe

Updated: November 10, 2022

gold portfolio
Editor’s Note:

EDITOR'S NOTE: Gold’s safe-haven role in a diversified portfolio: While the Fed’s tightening policies are still nowhere near completion, inflation, its target, hasn’t shown signs of abating. Regardless, investors see high-interest rates as a factor that can negatively impact gold. This is one reason why gold values remain depressed despite rising inflation and a declining market. Yet, this view may be significantly short-sighted. First, higher interest rates won’t necessarily make for a stronger dollar. Second, there are plenty of other worrisome factors on a global scale that is likely to boost gold in the long term. Read on to see how other experts are weighing in on the matter. As a side note, pay attention to the rate at which central banks have been accumulating gold over the last few years, specifically to counter the very economic threats that appear to be intensifying. This, perhaps, is a better gauge of gold demand than investor demand. Mainstream investors tend to underestimate economic risks and investment opportunities at every turn. Smart money, whether investors or financial institutions, take a more proactive approach to the markets. They tend to buy what the retail crowd sells, and they sell, in profit, what the retail crowd is often late to buy—in this case, physical gold.

(Kitco News) - The Federal Reserve is not done raising interest rates as the inflation threat remains persistently high. Although the central bank's aggressive monetary policy action could keep a lid on gold through the rest of the year, it still plays an essential role as part of a diversified portfolio, according to one market strategist.

In an interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said despite gold's disappointing price action through most of the year, it continues to outperform other major assets.

Although the S&P 500 has bounced off last month's two years lows, the broad equity market index is down 21% on the year. Meanwhile, gold prices holding new support above $1,675 an ounce is down roughly 9% year-to-date.

Although interest rates will continue to increase, Milling-Stanley said renewed fear of an economic slowdown could provide some bullish momentum for gold. Investors saw a glimpse of gold's potential on Friday as prices rallied sharply, up 3% as a critical recession gauge hit its highest level in 40 years.

Last week, the yield on 2-year notes rose more than 50 basis points above the 10-year. This is the largest inverted yield gap since the 1980s, the last time the Federal Reserve aggressively raised interest rates. Economists have noted that an inverted yield curve has preceded every recession since 1955.

"I don't think we need to see a full recession but a further slowdown in the economy for investors to see value in gold as a safe haven," he said. "For now, I hope that gold investors continue to appreciate the benefits of holding a long-term, safe-haven, strategic asset. I'm expecting that investors will see the rewards of their patience sometime next year."

Milling-Stanley noted that one of the only assets gold has underperformed against is the U.S. dollar. The greenback continues to trade near a 20-year high, supported by the Federal Reserve's commitment to cool down inflation by aggressively raising interest rates.

Originally published on Kitco News.

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