Gold Can Do What Bonds Can’t in a Superlow-Rate World



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 beenflooding 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.

People are clearly worried. Since May, polls conducted by the Conference Board show that consumers’ inflationary expectations have shot up to above 6%, from about 4.5% before the Covid-19 outbreak. Meanwhile, the future inflation rate implied by relative prices in the Treasury market has been steadily creeping up.

Gold can be a useful hedge against equity risk at times like this, according toGoldman Sachs Group Inc. History shows that gold outperformed stocks by a big margin when inflation went above its long-term trend. Gold is experiencing arecord-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 for inflation to hit 4.5%, or stay at a lower rate, such as 3.5%, for a sustained period. We’ve grown so accustomed to stability in the cost of living that any uptick would send traders scrambling for gold’s protection.

The 60/40 formula was conceived when bonds and stocks were still free markets’ agents. But now that the Fed is buying up everything from mortgage-backed securities to recently downgraded corporate debt, bonds have lost their usefulness as a hedge against stocks. A little gold might fill the gap.

• Pumping cash

The Fed’s balance sheet has grown substantially, from $4.2 trillion in early March, as it buys all kinds of debt to support the economy.

• Inflation fears

Investors and consumers are growing more concerned about inflation, according to market indicators and surveys.
Ren is a columnist forBloomberg Opinion.

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