Bloomberg News: Gold Can Do What Bonds Can't in a Superlow-Rate World

Article by Shuli Ren in Bloomberg News

In the past decade, a traditional 60/40 portfolio of stocks and bonds, as represented by the S&P 500 index and long-term government bonds, was a winner. But with U.S. bond yields moving toward zero or even negative territory, it may be time to rethink that mix. One thought: How about swapping out some bonds for gold?

In normal times, bonds serve as a hedge against falling stock prices, because they tend to rise in value when equities slump in an economic downturn. But this relationship starts to break down when government bond yields stay down for long periods—especially when they’re low as a result of central bank policy.

Moreover, we may be on the brink of an inflationary period, which would be bad for both stocks and bonds. The Federal Reserve has been flooding the financial system with cash: In just three months, assets held by the Fed ballooned by two-thirds, to almost $7 trillion, from $4.2 trillion in early March. Both monetary and fiscal stimulus have been larger than they were during the financial crisis.

Gold can be a useful hedge against equity risk at times like this, according to Goldman Sachs Group Inc.

History shows that gold outperformed stocks by a big margin when inflation went above its long-term trend. Gold is experiencing a record-breaking rally, with futures prices briefly touching $2,000 an ounce on July 31. In the Covid-19 era of easy money and low interest rates, Goldman estimates the price could rise even to $3,000. All it would take, the bank says, is ...

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