Despite recent market volatility, gold has maintained its strong performance, returning 21% year-to-date, second only to bitcoin. In the volatile month of August so far, gold is outperforming the S&P 500, Nasdaq, and bitcoin, trailing only bonds. Given rising economic and geopolitical uncertainty, we recommend maintaining exposure to gold in one’s portfolio for stability and diversification.
Historically, gold has been inversely correlated with real yields (inflation-adjusted interest rates). However, in 2022, this correlation broke as gold continued to rise despite significant Fed rate hikes. This was driven by increased demand from central banks, particularly those from emerging countries such as China and Turkey, tripling gold purchases from mid-2022 to 2024 due to fears of U.S. financial sanctions. As geopolitical tensions remain high, demand for gold reserves is expected to persist. Additionally, the U.S. debt ceiling crisis in 2023 prompted central banks to diversify reserves away from U.S. Treasuries into gold.
With inflation easing and economic data pointing to slowing growth, the Fed is likely to cut rates in September for the first time since March 2020, by at least 25 basis points, with more cuts possible in Q4. Historically, gold has performed well during the six months following the first rate cut in easing cycles, averaging a return of 9.4%, compared to the S&P 500’s 5.7%. Gold also serves as a solid risk diversifier. Over the past decade, whenever equities fell more than 10%, a 10% allocation to gold would have reduced portfolio drawdowns by an average of 1.54% compared to a traditional 60/40 portfolio. With a beta of 0.2 against the MSCI All Country World Index over the last 15 years, gold effectively diversifies market volatility. In conclusion, allocating gold in one’s portfolio is recommended due to strong central bank demand, historical resilience, and its role as a risk diversifier amid rising economic and geopolitical uncertainties.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.
The MSCI ACWI Index is a free float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes.
Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.
