The Blueprint


Is It Time to Invest In Gold?

Aug 2020

Inflation Concerns Are Heating Up

Considering there has been large fiscal and monetary stimulus injected into the economy in recent months, a lot of attention has been paid to the potential for inflation. Since inflation can bring significant risks to any portfolio, many investors have been looking at gold to serve as an inflation hedge in their portfolios. Our article seeks to answer the growing question, “Is it time to invest in gold?”

The unique relationship between the stock market and gold has made this asset class an important diversifier for long term investors. Historically, during periods of high market volatility gold prices and stock prices move inversely. This is because investors tend to flock to “safe haven” assets such as gold when markets look risky, pushing these prices higher. Due to this relationship, investors often consider gold a suitable hedge against weak performance in the stock market.

S&P 500 Vs. Gold


Source: Ycharts 11/19/2004-7/3-/2020, References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase.

Recently, the interest around gold has come in the form of maintaining purchasing power. This is becoming a much more topical discussion due to the amount of money that has been printed by the Federal Reserve. The Federal Reserve’s balance sheet currently stands at approximately $7 trillion. It took nearly one hundred years of the Fed’s existence to grow their debt to $3.8 trillion and only 4 months to get to $7 trillion. 1

Gold Preserves It’s Buying Power


Source: GoldEagle, Current Price of Gold Today, AAA Gas Prices, National Average Gas Prices, BLS, Average Price Data, Kelley Blue Book, Average New Vehicle Prices, CNBC, How Much the Average House Costs in 2020, Education Data, Average Cost of College [2020] 05/2020 – 08/2020

Recently, Jim Reid, Deutsche Bank’s top credit strategist, suggested that in his opinion, “fiat money will be a passing fad in the long-term history of money.” Reid states that in his view, “central bank balance sheets will explode in the decade ahead and probably beyond.” This perspective would support why gold is an important long-term asset class. Historically, when there is so much money being put into circulation, the value of that currency (in this case, the US dollar) starts to depreciate. As a result, investors are re-evaluting their portfolios and initiating allocations to gold.

Typically, investors allocate about 1-5% of their portfolio to gold.2 If this mindset begins to shift, even modestly, it could provide a massive amount of demand into the gold market. Although, under modern monetary theory the Federal Reserve can print an infinite amount of money, the production of gold is limited to what can be physically mined. So, if money starts flowing into an asset class with a constrained supply, like gold, the inherent result could push prices higher. Therefore, one can imagine the impact if pensions, global central banks, and retirement plans start to increase their allocations to gold. However, we remind our clients that we invest in gold as a hedge to protect against inflation and weakness in the dollar. We continue to believe the long-term growth for most clients will come from an appropriate allocation to equities (both domestic and international).

Correlation of Gold vs. S&P 500, Nasdaq, and Dow Jones


Source: Ycharts 1/1/2020-6/24/2020
Past results are not indicative of future returns. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses.

The above chart highlights the correlation of gold versus the S&P 500, Nasdaq, and Dow Jones. The blue bar is the correlation during low volatility markets, while the orange bar is the correlation during high volatility markets. Investment managers, traders, and analysts find it very important to calculate correlation because the risk reduction benefits of diversification rely on this statistic. Correlations are measured by a score of -1 to +1. A perfect positive correlation is a score of 1. This implies that as one security moves, either up or down, the other security moves in lockstep, in the same direction. A perfect negative correlation, -1, means that two assets move in opposite directions, while a zero correlation implies no relationship. During high volatility markets, the correlation between gold and stocks typically turns negative. This would suggest that gold would be a strong diversification asset class to reduce volatility in your portfolio.

About Blue Square Wealth

Our main objective is to reduce the volatility in your portfolio. It is our core belief that losing less in major down markets is key to a less volatile investing experience, and helps our clients to reach their long-term goals.


1) Source: Ycharts, US Total Liabilities Held by All Federal Reserve Banks, 1/1/07-6/24/20
2) CNBC

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