After a long downward spiral, gold is showing some luster again.
An ounce of the metal now fetches $1,231, up 16% since December.
Gold-mining stocks have done better--much better. Year-to-date,
VanEck Vectors Gold Miners ETF (symbol
, $23.03), an exchange-traded fund that tracks an index of mining
stocks, has soared 68%. The rally makes gold one of the
best-performing asset classes of 2016, handily beating stocks and
bonds. So should you jump aboard the gold train? Although the price
could keep climbing, buyers should beware. Here are five things you
need to know if you're thinking of investing.
What's driving the rally in the gold price?
Although gold is technically a commodity, it's really in a class
by itself. Unlike other commodities, the price doesn't just hinge
on industrial demand (which, in gold's case, is mainly for
jewelry). Investors also view gold as a currency, one that has
endured since the ancient Egyptian pharaohs. Prices rise when
investors grow nervous about the stock market, geopolitical
instability and inflation. Concerns about inflation can send
climbing if investors decide that paper currencies, backed by
nothing of tangible value, will lose purchasing power.
Lately, gold appears to have spiked for two main reasons. The
first is that the metal is priced in dollars, and when the dollar
weakens it becomes more expensive for foreign buyers to purchase an
ounce of the commodity. Although the inverse relationship between
gold and the dollar can break down for long stretches, it has been
relatively tight lately, with the dollar weakening between late
November and early May and the
price of gold
Gold is also rallying, some analysts say, because interest rates
remain near rock bottom in major developed economies, and they may
not climb as much as investors had expected. Government bond rates
are now so low in Europe and Japan that they're actually negative;
investors are paying governments for the privilege of lending them
money. Moreover, some bonds pay less interest than prevailing
inflation rates, meaning that investors are practically guaranteed
a loss, after inflation, if they hold the bonds to maturity. Gold
bullion doesn't pay anything, of course, and incurs storage and
other costs. But at least it can hold more of its value than these
government bonds, the argument goes, making gold a better bet.
Investor demand for gold, in fact, appears to be the main driver
pushing up prices. Investors bought $8.4 billion more in gold and
mining ETFs than they sold in the first three months of the year,
according to research firm FactSet. Overall, global demand for gold
climbed 21% in the first quarter, according to the World Gold
Council, which sponsors the SPDR Gold Shares (
), an exchange-traded product that tracks the price of bullion.
Investors who buy exchange-traded products, along with central
banks, accounted for much of that increase in demand, says the
Does the gold rally have legs?
The metal could keep climbing if the dollar slides further or
investors start to worry that inflation will spike. But neither
scenario looks highly likely right now.
The Federal Reserve has signaled that it may increase its
benchmark short-term rate this June, which is sooner than expected.
Higher U.S. rates would likely push up the dollar, depressing the
price of gold. Indeed, the dollar has edged up (and gold has
slumped) since word broke on May 18 that Federal Reserve members
have warmed up to the idea of hiking short-term rates at their June
Some analysts also think the rally will peter out because gold
is in the grips of a 20-year "bear super cycle." That's the view of
John LaForge, head of real asset strategy at Wells Fargo Advisors.
As he sees it, commodities move in tandem in long upward or
downward cycles. "Investors either really love commodities or they
really hate them," he says. For decades, the average bull market in
commodities has lasted for 16 years, while the average bear market
(a decline of at least 20% from peak prices) has endured for 20
If the pattern persists for gold, it could be many years before
the metal reaches new highs. LaForge believes the bear market in
gold kicked off in September 2011, when prices peaked at $1,895 an
ounce. If gold is in a long bear market, this rally would just be a
bounce off the lows, with gold headed back down as mining capacity
ramps up, boosting supplies. "At $1,250 an ounce, miners that had
shut down mines when the price was $1,000 can get back in and start
making money again," he says.
Will gold protect you against a stock market downturn?
Worrywarts love gold because they believe it's one of the few
investments that can act as a "safe haven" when things look bleak.
Some advisers recommend holding 2% to 5% of a diversified
stock-and-bond portfolio in gold as a hedge against a stock market
downturn or some unforeseen economic crisis.
Yet the idea that gold will protect your portfolio from a
downturn in stocks isn't a slam dunk. True, gold and stock prices
can diverge--most notably in August 2011, when gold peaked and U.S.
stocks hit a low after Standard & Poor's downgraded the U.S.
government's credit rating. Although gold tumbled for months during
the financial crisis, the metal wound up posting a 3% gain in 2008,
when Standard & Poor's 500-stock index plummeted 37%.
Yet since 1975, when gold first started trading freely, bullion
prices have moved in and out of lockstep with the stock market,
converging and diverging a similar number of times. "It's a coin
flip," says Claude Erb, an independent researcher in Los Angeles
who wrote an academic paper about gold with Campbell Harvey, a
professor at Duke University's Fuqua School of Business.
Granted, gold can help to diversify a portfolio. But don't
mistake the metal for a true safe-haven asset like cash. If the
stock market tumbles 20%, gold may not fall as much, but it could
still decline. Moreover, anemic periods for stocks can be deadly
for gold. In 2015, a year in which the S&P 500 eked out a 1.4%
return, the price of gold fell 11% and the VanEck gold-mining-stock
ETF plunged 25%. "It would be very misleading to conclude that if
there's a crisis in the stock market, then gold will somehow
provide positive returns to make up for that," says Harvey. If you
want a safe haven, he advises, stick with cash.
Will gold be a good hedge against inflation?
Gold bugs argue that the metal provides the best way to protect
your purchasing power in a world of devalued currencies and steeper
inflation. But the historical evidence isn't so convincing.
Although gold started ascending in the early 2000s, it spent
decades in decline before then. From 1980 to 2000, the "real" price
of gold (that is, adjusted for inflation) fell by about 70%. In
other words, an ounce of gold in 1980 held just 30% of its value 20
years later. U.S. inflation edged lower in that span, but it was
never zero. In Brazil, which experienced 250% annualized inflation
from 1980 to 2000, holding gold was no panacea.
These days, central bankers seem more concerned about deflation
than inflation. And gold may not be a good bet because it looks
overvalued. Adjusted for inflation, the price should be $820 an
ounce, says Erb, 34% below current levels. Gold may be a winning
wager at those prices, but not today.
If you want to invest in gold, what's the best way to
Gold advocates typically opt for bullion or coins, arguing that
it's the only way to really safeguard the investment. Buy bars or
coins, though, and you'll need to store it in a vault or pay a firm
to hold it for you.
Gold ETFs make it easier to invest. The ETFs closely track the
day-to-day price of the metal, and they store gold in amounts
equivalent to the size of their fund assets. The largest such fund,
SPDR Gold Trust (
, $116.98), has $34.1 billion in assets, making it one of the
largest exchange-traded products on the market. Its annual expense
ratio is 0.40%. (Unless otherwise indicated, all prices and returns
are through May 25.)
A cheaper ETF is iShares Gold Trust (
, $11.81). Its annual expense ratio of 0.25% makes it more
cost-effective than the SPDR fund. So far this year, the ETF has
gained 15%, and it has returned an annualized 6.2% over the past
decade, according to Morningstar.
Mining stocks offer more bang for the bar, both on the up side
and on the down side. The VanEck Vectors Gold Miners ETF (
) holds a basket of the big miners, with its top three
holdings--Barrick Gold (
), Newmont Mining (
) and Goldcorp (
)--accounting for about one-fourth of the fund's assets. The fund,
which charges 0.52% annually, has slumped sharply as the price of
gold has retreated recently. From the May 17 close through May 24,
the ETF sunk 12%. Even with this year's rally, the ETF has lost
some two-thirds of its value since peaking in September 2011.