Morgan Stanley

Gold’s Time to Shine?

Gold has long been viewed as a ‘safe haven’ for investors in a slowing economy. Now may be a good time to add it to your portfolio.

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 U.S. dollar’s purchasing power wanes.

In addition, gold is largely uncorrelated to U.S. 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 U.S. recessions since 1973, gold outperformed the S&P 500 Index.

With the price of gold near an all-time high, there are three key reasons to consider investing now:

A weaker U.S. dollar is generally good for the price of gold

Historically, gold and the U.S. dollar have shown an inverse relationship to one another: When the dollar’s value declines relative to other currencies, the price of gold tends to increase, and vice versa. There is strong potential for a weaker dollar in the second half of 2023, 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 levels.

Declining interest rates could drive up the price of gold

Gold is considered a “long-duration” asset, meaning it may be especially sensitive to changes in interest rates. For example, over the past 25 years, the price of gold has risen about 10% for every percentage point of decline in the inflation-adjusted, or “real,” interest rate of the benchmark 10-year U.S. Treasury bond. That’s noteworthy for investors today because the Federal Reserve, after rapidly increasing rates to tame decades-high inflation, may eventually start cutting them, potentially sending the price of gold higher.

Central banks are buying gold at a rapid pace

In 2022, central banks bought gold at the fastest pace since 1967, at about 1,136 tonnes.1 This year, central bank purchases hit 228 tons in the first quarter,2 breaking the first-quarter record previously set in 2013—and there is little indication that the pace will slow. There are a few key reasons for such heavy central-bank demand:

Gold may be a way to hedge the inflation that many countries continue to experience.

Some countries are looking to diversify away from major currencies like the U.S. dollar, euro, Japanese yen and British pound.

Developing countries’ central banks remain under-allocated to gold relative to their developed-market peers. While gold’s prospects depend heavily on the direction of the U.S. dollar and interest rates, its traditional role as a safe-haven asset during difficult economic times and as a hedge against slowing growth, along with potential long-term support from central bank buying, may signify its growing importance in an investment portfolio as part of a risk-management strategy.

To learn more, ask your Morgan Stanley Financial Advisor for a copy of the May 17 Global Investment Office report, Global Insights: What Will Drive Gold From Here? Your Financial Advisor can help you assess tactical opportunities to invest in the precious metal as well as how your portfolio may benefit long-term from exposure to gold.

Key Takeaways

  • Gold has historically acted as a hedge against inflation by rising in value when the purchasing power of the U.S. dollar wanes.
  • It may also act as a buffer against stock market volatility during economic slowdowns.
  • A weaker dollar, potentially lower interest rates and central bank buying could support higher gold prices through year-end.

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