Gold Rallies in 2024. But Is It a Solid Long-Term Investment?

Gold has been in rally mode in 2024. Year-to-date, the precious metal is up over +25%, outpacing the S&P 500 index.

It’s fair to say that fundamental drivers have helped gold’s rise this year. A weaker U.S. dollar and declining real rates have historically bolstered gold, and there’s been a strong source of demand coming from global central banks. China, for instance, has 45% more gold holdings today than it did in the summer of 2022.

Then there is the fiscal deficits and national debt issue, both in the U.S. and abroad.

U.S. federal debt has soared on the heels of two “black swan” events, i.e., the 2008 Global Financial Crisis and the Covid-19 pandemic. Add to that the annual budget deficits equivalent to 6-7% of gross domestic product (GDP), and you get aggregate public debt ballooning to nearly $35 trillion and well over 100% of GDP. These are aggregate debt-to-GDP levels we have not seen since World War II, and there appears to be no appetite on either side of the political aisle to rein it in.

Federal Debt as a Percent of U.S. GDP

Federal Deficits Keep Getting Bigger

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A Better Way Forward for Passive Investors

Passive investing using ETFs has become popular, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500. Unfortunately, these funds make it difficult to beat the market—because an index fund essentially is the market.

Zacks Advantage offers a better way forward: We have always been committed to a research-driven investment process, and we have refined our active investment experience to optimize the passive investment realm. Our actively managed robo advisor offers:

• Targeted asset allocation
• Automatic diversification
• Built-in discipline
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Learn more with our free guide, A Better Way Forward: Actively Managing Passive Index Funds. ³

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Some investors may also cite inflation as a thesis for owning gold. Some see the connection between gold and inflation as an investment truism, one that resides in the same category as diversification as a means for controlling risk, for example. But history shows that gold has not historically been a reliable and consistent inflation hedge. In fact, gold may not be any better than other asset classes at protecting against rising prices.

The most recent example is 2021 and 2022, which saw soaring inflation and underperforming gold. Bigger picture, a recent study by economists at Duke University and the National Bureau of Economic Research looked closely at the relationship between gold prices and the consumer price index (CPI) throughout history. They found that over 1, 5, 10, 15, and 20-year investment horizons that “the variation in the nominal and real returns of gold [have] not been driven by realized inflation.”

In other words, gold prices have not consistently tracked inflation over the years. In fact, gold has been quite volatile relative to inflation over the years, sometimes tracking nicely with the CPI but many times deviating widely in price.

The researchers surmised that if gold was a reliably good inflation hedge, the ratio between gold and the CPI should have remained relatively steady over the years. But it didn’t—over the past 50 years, the ratio of the price of gold to the CPI has fluctuated from 1.0 to 8.4, with wild swings along the way. A true inflation hedge would have a much stronger correlation, according to researchers, and much lower volatility. If investors are willing to accept volatility over long stretches of time as they attempt to hedge inflation, then they may as well own stocks instead. ⁴

Bottom Line for Investors

Since becoming freely traded in 1974, gold has been highly volatile and a poor performer relative to stocks and bonds. U.S. stocks’ outperformance of gold over that time is nowhere near a close race, and bonds have roughly doubled the performance of gold since 1975. For investors seeking to generate solid positive returns from investment in gold, it’s been all about precision timing – a very difficult feat to achieve.

This is not to say that gold cannot outperform going forward – it certainly could. But a few realities remain that might inhibit gold from becoming a better investment than stocks:

• Gold doesn’t generate earnings;
• It doesn’t pay dividends;
• It doesn’t create new products or services that add value to the economy; and,
• It hasn’t consistently, over time, delivered long-term attractive returns to investors.

At the end of the day, gold can be a useful asset in small allocations for diversifying a portfolio, but investors should use caution if or when considering it as a major investment holding, in our view.

Passive investing has become a popular approach, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500.

However, a purely passive approach cannot beat the market (because it basically is the market). That’s why Zacks Advantage offers an actively managed robo advisor that:

• Invests exclusively with ETFs
• Uses technology to recommend the appropriate mix of equities and bond ETFs to help achieve your investing goal and specific risk tolerance
• Lowers fees and expenses

Get our free guide, A Better Way Forward: Actively Managing Passive Index Funds ⁵, to learn the 4 issues that can hold back returns for passive investors, and how Zacks Advantage can help you overcome them.

Download our FREE Guide⁵

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¹ Fred Economic Data. September 26, 2024.

² Fred Economic Data. September 26, 2024.

³ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

⁴ SSRN. 2024.

⁵ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

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