Gold is up 75% since 2023, outpacing the S&P 500—does this underdog have more steam left?
KEY TAKEAWAYS
Gold is up 75% since November 2023, outpacing the S&P 500’s 41%
Historically, gold spikes in crises but disappoints afterward
Gold doesn’t pay dividends, compound wealth, or generate innovation
Current rally fueled by weaker dollar, Fed policy shift, deficits, and geopolitics
Since 1980, S&P 500 outperformed gold by 18,823% vs 682%
MY HOT TAKES
Gold is the carpenter on the sailboat–helpful in a leak, dead weight otherwise
Gold’s run is real but temporary; history shows it fades once fear passes
Investors confuse protection with prosperity–gold offers the former, not the latter
The Fed, deficits, and geopolitics explain the current surge, not fundamentals
Gold can climb mountains, but it won’t carry you to wealth
You can quote me: “Gold is the little engine that could–but it’s still not the hero of the investing storybook.”
The little engine that could. I can still see that little blue locomotive engine in that book my mother read to me so… so many years ago. Have you noticed gold, recently? It is like the Little Engine That Could, that classic American children’s story about a small train that climbs a mountain through sheer determination. For my European followers, think of the Ugly Duckling turning into a swan (my mom also read this one to me). And for my Korean readers, it’s the spirit of Heungbu, who through kindness and perseverance overcomes hardship and is ultimately rewarded. All these stories show how a protagonist, or underdog comes out as the surprising winner.
For most investors, gold is kind of a second–or even third thought. I used to say that it is that one investment that you wished you owned once or twice a year and hated it for the balance. That is because, historically at least, it was an asset of last resort. You know, when 💩 is hitting the fan, it would go up as investors rushed into it as a safe haven. Though it makes little sense in any practical scenario–unless all society crumbles into some dark-ages feudal system with no banking infrastructure–what matters is that demand spikes causing it to rise. So, yeah when things get super spicy in the markets, you see the headlines like “Gold spikes as investors rush to safety,” and you wish you owned it before the spike.
That headline also spurs many investors to jump in after the initial spike. Historically, those ended up being the bag holders. In trader talk, “bag holders” means they were the last ones in–too late–only to watch it fall back after the fear passed, racking up losses.
Now what did I mean when I said “hated it for the balance?” Well, in investing, we often talk about how important diversification is. Diversification spreads investments across different assets so that no single setback sinks the whole portfolio. By holding a mix that doesn’t all move the same way, you reduce risk while still aiming for steady returns. But sometimes, diversification can be the enemy of great returns.
Imagine if you had a sailboat that could only fit 4 crewmembers. Would you fill the slots with 4 stout sailors or 3 sailors and 1 carpenter? Of course, a carpenter would come in handy if you sprung a leak, but in the absence of a leak (which is rare), that carpenter was dead weight and slowed the boat's progress. Gold was historically, like that carpenter, dead weight, slowing progress… most of the time… except those 1 or 2 days a year.
Now, I know that there are gold fanatics shaking their heads while reading this. First, I want to say that gold does not pay dividends. It has no fundamentals, no earnings, or no innovation to invest in. It is an industrial metal whose price should be determined purely by supply and demand. Supply is limited to what the earth yields to humankind and demand… well, we just discussed that. But there is real demand for things like jewelry and electronic components. We see demand increases around certain holidays in which gold jewelry is exchanged. We also see industrial demand increase when cyclical economies enter expansion periods, because, at least theoretically, more “stuff” is produced. Check out this chart, then keep reading.
This is a chart showing the price of gold going back to 1975. You will see if you look closely, that the low was $104. The high is… well, right now at around $3400. Are you shocked that gold was once only at 104? Well, you would be even more shocked if I told you that it was in the 30s a few years earlier before Nixon ended the Bretton Woods system cutting the dollar’s tie to gold. After that, the metal entered free-market pricing and the inflation surge that came in the 70s and 80s–largely driven by energy supply shocks and loose monetary policy–saw gold take its first leg up. It is also the first time we saw gold as a hedge against geopolitical risk as it climbed with the Soviet invasion of Afghanistan and the Iran hostage crisis. Inflation was crushed by then-Fed Chair Paul Volcker with interest rates near 20%.
After that, it was almost 20 years before the next shock would push the metal higher–the Global Financial Crisis. In the wake of the GFC, central banks lowered interest rates to 0% or lower. 🤯Quantitative easing and the European debt crisis–AKA money printing–caused further fears of fiat debasement (non-gold tied currencies losing value), and investors rushed into gold as a hedge. In 2020, the pandemic shock along with the massive fiscal and monetary stimulus caused a repeat of this demand surge, but on a larger scale.
Similar to the 1980s when Volcker crushed inflation with high interest rates, Powell attempted and slowed inflation in 2022 and 2023. We can see, if we look really closely, how gold pulled back as inflation ebbed. All seemed normal until November of 2023 when gold surged and never looked back. What happened? The primary driver was the Fed signaling an end to rate hiking. That caused the dollar to weaken.
At a very basic level, the dollar weakens with lower interest rates as demand for the sovereign debt declines lowering demand for dollars. Did you know that gold is priced in US Dollars globally? It’s true. So, when the Dollar is weaker, gold technically becomes cheaper for foreign currency buyers. So, a weaker dollar causes gold to go higher. Lower interest rates also cause the opportunity cost of owning gold (which pays no dividend–0% yield) to become cheaper.
All of these combined with rising geopolitical tensions caused gold to leap above the key technical resistance level of $2000. As 2024 came to a close, it became clear, based on the campaign promises of both candidates, that the deficit was about to get bigger. That means more money printing.
Turn the clock forward to today. Geopolitical tensions are at extreme levels. Tariffs are threatening to slow economic growth and cause inflation. The dollar is down by some -10% year to date. Many expect the Fed to lower interest rates in the near term. Despite the administration's best efforts to cut spending, the federal deficit is on the rise. It would seem that all the past reasons for gold spikes are present today. That certainly can explain why gold is where it is. But there is more. Foreign central banks are loading up on it as an alternative to the US dollar increasing demand even more.
It turns out that owning gold, at least for the past 2 years or so, was a pretty good investment; gold was up by some 75% since November of 2023. It has certainly not held back diversified portfolios since then. The S&P 500 only gained around 41% during that period, so owning only gold, you would have outperformed the market. This little engine that could certainly DID in the past couple of years–a happy ending.
But the story isn’t over yet. Looking at the chart above you can see that each of the past rallies, 1980, 2011, 2020, has been followed by a long stretch of disappointment once the inflation panic cools, the Fed regains credibility, or investors rediscover risk assets. You see, ultimately, gold protects when confidence in money breaks down, but it doesn’t compound like equities, pay coupons like bonds, or throw off cash like real estate. Indeed, gold can climb mountains, it has, and it certainly appears like no ugly duckling today, but unfortunately it will not take you to prosperity over the long run. It has been an impressive run picking up some 682% since the start of 1980. It is a surprising winner of late, but not THE winner, by any stretch. The S&P 500 gained 18,823% including dividends in that same period.
FRIDAY’S MARKETS
Stocks fell on Friday as tariff fears continued, inflation came in as expected, and sentiment was revised downward. AI stocks are under pressure as Chinese companies line up to challenge their dominance.
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