How Do Gold and Bonds Compare?

How Do Gold and Bonds Compare?


Written by John Rothans

Jan 31, 2020

In an environment of ultra-low interest rates, people should consider gold as a replacement for bonds, the World Gold Council advises. In fact, the Council recommends looking at increasing exposure to gold as part of a diversified portfolio.

In October 2019, the World Gold Council noted that as central banks have shifted to an “easy” lower-interest monetary policy, the expected returns for bonds have gone down. Thus, the Council suggests that gold be weighed as a substitute for bonds.

What’s Going on with Bonds Right Now?

As explained by the American Association of Individual Investors, bond prices rise and fall when two things happen: Interest rates change, and credit quality changes.

“Since the late 1970s, changes in the interest rate environment have become the greatest single determinant of return on bond investments. Managing interest rate risk has become the most critical variable in the management of bond portfolios,” the Association reports.

Bond prices have declined as the Federal Reserve continues to maintain low interest rates. Experts anticipate interest rates will remain steady (and low) throughout 2020. That translates into a likely extension of the low-price, low-yield run for bonds. In late January 2020, the closely watched 10-year Treasury yield dipped to its lowest level in three months; at the same time, gold prices remained above $1,500 per ounce.

How Are Bonds Related to Gold?

The World Gold Council points out that low interest rates might make gold more effective than bonds in terms of easing market risks, diversifying your portfolio, and helping you achieve your long-term financial objectives.

When real, or inflation-adjusted, rates have been negative, gold has historically returned twice as much annually as the long-term average, or 15.3%, the Council notes. Even when inflation-adjusted rates have been on the low end of the positive scale, gold has generated higher average returns.

“Effectively, it has only been during periods of significantly higher real interest rates—an unlikely outcome given the current market conditions—that gold returns have been negative,” according to the World Gold Council.

Why Is Gold a Safe Haven?

Over time, gold has remained a store of wealth. Therefore, it can be seen as a shield against harmful economic occurrences, such as recession or inflation, that often drive down prices for stocks and bonds. An asset that acts in this way is commonly called a “safe haven.”

“For thousands of years, gold has been recognized worldwide as the ultimate means of trading and storing wealth,” Anne Jessopp, chief executive of the United Kingdom’s Royal Mint, told The Financial Times newspaper.

In September 2019, Investment News reported that over the 15-year period through December 2018, a portfolio with a 60% allocation to the S&P 500 Index and a 40% allocation to the Bloomberg Barclays US Aggregate Bond Index produced a 10% annualized gain and an annualized risk of about 10.5%.

But when the portfolio was reconfigured to 60% stocks, 25% bonds, and 15% gold, the annualized return improved to nearly 11.2%, with an annualized risk of 11%, according to Investment News. (Those figures come from research conducted by GraniteShares, which offers a gold ETF.)

Do you have gold or bond questions? Call 1-844-307-1589 to speak with a knowledgeable Account Executive. We can help explain what we’re seeing in the precious metals market and offer you a one-on-one consultation.


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