The Blueprint

Is It Time to Invest In Gold?

Aug 2020

Inflation Concerns Are Heating Up

Considering there has been large fiscal and monetary stimulus injected into the economy in recent months, a lot of attention has been paid to the potential for inflation. Since inflation can bring significant risks to any portfolio, many investors have been looking at gold to serve as an inflation hedge in their portfolios. Our article seeks to answer the growing question, “Is it time to invest in gold?”

The unique relationship between the stock market and gold has made this asset class an important diversifier for long term investors. Historically, during periods of high market volatility gold prices and stock prices move inversely. This is because investors tend to flock to “safe haven” assets such as gold when markets look risky, pushing these prices higher. Due to this relationship, investors often consider gold a suitable hedge against weak performance in the stock market.

S&P 500 Vs. Gold

Source: Ycharts 11/19/2004-7/3-/2020, References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase.

Recently, the interest around gold has come in the form of maintaining purchasing power. This is becoming a much more topical discussion due to the amount of money that has been printed by the Federal Reserve. The Federal Reserve’s balance sheet currently stands at approximately $7 trillion. It took nearly one hundred years of the Fed’s existence to grow their debt to $3.8 trillion and only 4 months to get to $7 trillion. 1

Gold Preserves It’s Buying Power

Source: GoldEagle, Current Price of Gold Today, AAA Gas Prices, National Average Gas Prices, BLS, Average Price Data, Kelley Blue Book, Average New Vehicle Prices, CNBC, How Much the Average House Costs in 2020, Education Data, Average Cost of College [2020] 05/2020 – 08/2020

Recently, Jim Reid, Deutsche Bank’s top credit strategist, suggested that in his opinion, “fiat money will be a passing fad in the long-term history of money.” Reid states that in his view, “central bank balance sheets will explode in the decade ahead and probably beyond.” This perspective would support why gold is an important long-term asset class. Historically, when there is so much money being put into circulation, the value of that currency (in this case, the US dollar) starts to depreciate. As a result, investors are re-evaluting their portfolios and initiating allocations to gold.

Typically, investors allocate about 1-5% of their portfolio to gold.2 If this mindset begins to shift, even modestly, it could provide a massive amount of demand into the gold market. Although, under modern monetary theory the Federal Reserve can print an infinite amount of money, the production of gold is limited to what can be physically mined. So, if money starts flowing into an asset class with a constrained supply, like gold, the inherent result could push prices higher. Therefore, one can imagine the impact if pensions, global central banks, and retirement plans start to increase their allocations to gold. However, we remind our clients that we invest in gold as a hedge to protect against inflation and weakness in the dollar. We continue to believe the long-term growth for most clients will come from an appropriate allocation to equities (both domestic and international).

Correlation of Gold vs. S&P 500, Nasdaq, and Dow Jones

Source: Ycharts 1/1/2020-6/24/2020
Past results are not indicative of future returns. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses.

The above chart highlights the correlation of gold versus the S&P 500, Nasdaq, and Dow Jones. The blue bar is the correlation during low volatility markets, while the orange bar is the correlation during high volatility markets. Investment managers, traders, and analysts find it very important to calculate correlation because the risk reduction benefits of diversification rely on this statistic. Correlations are measured by a score of -1 to +1. A perfect positive correlation is a score of 1. This implies that as one security moves, either up or down, the other security moves in lockstep, in the same direction. A perfect negative correlation, -1, means that two assets move in opposite directions, while a zero correlation implies no relationship. During high volatility markets, the correlation between gold and stocks typically turns negative. This would suggest that gold would be a strong diversification asset class to reduce volatility in your portfolio.

About Blue Square Wealth

Our main objective is to reduce the volatility in your portfolio. It is our core belief that losing less in major down markets is key to a less volatile investing experience, and helps our clients to reach their long-term goals.

1) Source: Ycharts, US Total Liabilities Held by All Federal Reserve Banks, 1/1/07-6/24/20

Blue Square Wealth is a SEC-Registered Investment Adviser. A copy of the Firm’s Current Disclosure Brochures can be found on the SEC’s IAPD site or may be requested at any time by contacting us. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Securities and Exchange Commission.

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. Past performance is not indicative of future returns.

Significant risk may accompany investments in stocks, bonds or other asset classes over short periods of time. Investment return and principal value will fluctuate with changes in market conditions. Your investment may be worth more or less than your original cost. Past performance is not indicative of future results.

This blog is a publication of Blue Square Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of subjects discussed. All expressions of opinion reflect judgment of author as of date of publication and are subject to change. Information contained herein does not involve rendering of investment advice. A professional adviser should be consulted before implementing any of strategies presented. Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell securities mentioned herein. Different types of investments involve varying degrees of risk. Economic factors, market conditions, and investment strategies will affect performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements relating to objectives, opportunities, and future performance of U.S. markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “should,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to economic conditions, changing levels of competition in industries and markets, changes in interest rates, and other economic, governmental, regulatory and other factors affecting a portfolio’s operations that could cause results to differ materially from projected results. Such statements are forward-looking in nature and involve known and unknown risks, uncertainties and factors, actual results may differ materially from those reflected in forward-looking statements. Investors cautioned not to place undue reliance on forward-looking statements / examples. None of Blue Square Wealth or any affiliates, principals nor any other individual / entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.