The current bull market, which began in October 2022, has been dominated by innovations that have the potential to revolutionize our world and take us into a new era. Artificial intelligence, cryptocurrency, self-driving cars and electric vehicles, and other advancements have gripped the attention of the media, consumers, and investors alike – and for good reason. However, one of the biggest winners of the bull market (and the 21st century as a whole) is one of the oldest valuable assets in history – gold.
Since the current bull market began, gold has outpaced the S&P 500’s cumulative return by over 30%. Since the launch of ChatGPT at the end of November 2022, which kickstarted the AI craze, gold’s cumulative return trails that of the Nasdaq by just 3%. Looking further out, gold has incredibly matched the total return of the American stock market over the past 20 years since the launch of the first gold-backed ETFs:
Source: Charlie Bilello, Creative Planning
In that time frame, gold’s volatility has been comparable with that of the stock market – 17% annualized standard deviation vs. 15% for the S&P 500 – but at very low correlations to traditional asset classes, providing diversification benefits for portfolios even at small allocations:
Source: Morningstar Direct. 60-40 Portfolio is 60% global equities (MSCI ACWI GR USD) and 40% US aggregate bonds (Bloomberg US Agg Bond TR USD)
So, why has gold been able to sustain its outstanding performance over the past 20 years? Gold has a diversified set of demand sources, including jewelry, investments, central bank reserves, and technology. Jewelry has seen steady growth of about 9% per year since 2010, according to Bain and Company, and gold’s use cases in technology continue to expand as well.
For investors, access to gold has never been faster, more liquid, and lower cost than it has been over the past 20 years since the release of gold-backed ETFs. State Street’s SPDR Gold Shares ETF (GLD) launched in late 2004, and BlackRock’s iShares Gold Trust (IAU) launched just months after, giving retail investors more liquid access to the price of gold than ever before. Historically, gold has been seen as a “haven asset,” or a place to shelter assets from geopolitical or economic risks, and the past 20 years have had their share of global volatility at a time when gold is more accessible than ever.
Gold is also viewed as a place to hold assets if an investor is worried about the strength of its currency and the quality of government-backed debt. Before the financial crisis, the U.S. had carried the national debt between 50%-65% of GDP for about 20 years. In the wake of the Great Recession, that figure rose rapidly to just under 100% of GDP in just a few years and never broke below that floor again. Between 1998-2011, the average annual correlation between the growth of the M2 money supply and the price growth of gold was -0.17. Since 2012, that correlation has been 0.64. Put simply, once the debt-to-GDP ratio hit 100%, it seems more money printing has been bullish for gold.
Central banks like the Federal Reserve and the European Central Bank purchase and hold gold in their reserves just like other currencies and are another major source of demand for the metal. These banks have been net purchasers of gold for years, but in the last three years have purchased more than double their average annual net purchases from the decade prior, according to the World Gold Council:
Source: Gold Demand Trends
It is ever important to remember that gold is a volatile asset and carries risk for portfolios. However, looking ahead, a few global trends lend themselves to a continuously positive environment for gold.
- Money Printing is Back: After a brief pause in the growth of the M2 money supply following the explosion we saw during the pandemic, money supply growth is back to pre-pandemic levels and has been accelerating for over a year:
Source: FRED
- Massive Deficits Are Continuing: In 2024, the U.S. ran a budget deficit at 6.3% of GDP – a level never seen before except for during the pandemic, the financial crisis, and World War II. The Congressional Budget Office expects deficits of this size to continue into the foreseeable future due to “higher interest costs and sustained primary deficits.” Investors and central banks who have been buying gold instead of Treasuries as a haven asset will likely continue to have reason to do so.
- Foreign Central Banks’ Appetites for Gold are Accelerating: For the first time since 1996, foreign central banks hold more gold than Treasuries as a percentage of their foreign reserves. China in particular has been adding to its stockpile for some time; gold now makes up 7.6% of China’s total reserves.
Source: Tavi Costa
Due to the asset’s volatility, it’s important to size positions in gold with care. Its very low correlation to stocks and bonds means that diversification benefits can be achieved even at small allocations of otherwise diversified portfolios and offer a differentiated source of return. The patterns and factors discussed above have helped gold maintain its relevance in modern markets, and continuing trends may offer a positive environment for gold to continue delivering a differentiated source of return with unique diversification benefits for portfolios.