Gold’s time to shine with investors?

Investors have long considered gold as a safe haven that can help diversify their portfolios and weather turbulence in the economy and markets. One of the world’s oldest forms of currency, the precious metal has historically acted as a hedge against inflation by rising in value when the US dollar’s purchasing power wanes. In addition, gold is largely uncorrelated to US equities, meaning its value doesn’t typically follow the same ups and downs, potentially making it useful for investors during times of economic stress. In fact, in six of the eight US recessions since 1973, gold outperformed the S&P 500 Index.¹

With the price of gold near an all-time high, Morgan Stanley strategists see three key reasons to consider investing in the precious metal now:

Morgan Stanley strategists believe there is strong potential for a weaker dollar in the coming months, which could drive demand and higher prices for gold. In fact, in the last 40 years gold has delivered the best six-month returns when the dollar has fallen from elevated values.²

Even if the dollar proves resilient in the next couple of months, the strategists say, its continued strength is unlikely to persist beyond the very short term. 

The S&P 500 index and gold are largely uncorrelated

Gold is considered a “long-duration” asset, meaning it may be sensitive to changes in interest rates. For example, if rates decline, gold might be expected to rally more, on a percentage basis, than other types of assets, like cash or cash equivalents, with shorter durations.

Morgan Stanley strategists looked at the past 25 years and found that the price of gold has risen about 10% for every percentage-point of decline in the interest rate of the benchmark 10-year US Treasury bond. That’s noteworthy for investors today because the Federal Reserve, after rapidly increasing rates to tame decades-high inflation, may soon pause its rate hikes and eventually start cutting rates, potentially sending the price of gold higher.

Although the investment and jewelry categories account for more than half of total demand for gold, central banks have emerged as another prominent buyer.

Last year, central banks bought gold at the fastest pace since 1967–at about 1,136 tonnes.⁴ In the first quarter of this year alone, central bank purchases hit 228 tons, breaking the first quarter record set in 2013.⁵  Why such heavy central-bank demand? For one, gold may be seen as a way to hedge the inflation that many countries continue to experience. In addition, some countries are looking to diversify away from major currencies like the US dollar, euro, Japanese yen, and British pound. And developing countries’ central banks remain under-allocated to gold relative to their developed-market peers.

Gold demand benefited from a surge in central bank buying last year

Gold seems to have the wind at its back in the near future. A weaker dollar, potentially lower interest rates, and central bank buying could support higher gold prices through year-end and signal the metal’s growing importance within portfolios.

As always, when considering investing in precious metals like gold, consider your individual timeline, goals, and financial risk tolerance.

1. Source: https://www.institutionalinvestor.com/article/b8yknj063h7ydd/How-Does-Gold-Perform-With-Inflation-Stagflation-and-Recession
2. Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office as of April 28, 2023.
3. Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office as of April 28, 2023.
4. Source: https://www.gold.org/goldhub/data/2022-central-bank-gold-reserve-survey#:~:text=How%20do%20you%20expect%20global,over%20the%20next%2012%20months