MARKET INSIGHTS

Stay long gold, just not as a hedge

Feb 3, 2025
  • Russ Koesterich, CFA, JD

In this article, Russ Koesterich discusses why gold may continue to advance in 2025 despite a stronger dollar and elevated real rate environment.

Key takeaways

  • Historically, higher real rates and a strong U.S. dollar have served as headwinds for gold.
  • Recently the price of gold has continued to advance despite these factors with support stemming from central bank purchases and growing U.S. deficits.
  • In this environment, gold is less likely to act as a hedge to equities but rather as a long-term store of value.

Gold continues to work. Year-to-date, the precious metal is up 3%, beating stocks. On a one-year basis, gold has gained more than 30%, making it one of the best performing asset classes (see Chart 1).

Chart1
Asset Performance - Last 12 Months

This chart show the asset performance for the last 12 months. The bars show the total return in local currency terms, except gold and copper, which are spot returns.

Source: LSEG Datastream, chart by BlackRock Investment Institute. Jan 16, 2025
Note: The bars show the total returns in local currency terms, except for currencies, gold and copper which are spot returns. Government bonds are 10-year benchmark issues. RO-191915

I last discussed gold back in October. At the time, I suggested gold’s role in a portfolio was not as an inflation hedge, but as a store of value at a time of excessive and still growing government deficits. This represented a changing dynamic, with gold no longer as sensitive to changes in key economic variables, such as the U.S. dollar or inflation-adjusted interest rates.

Since then, gold has continued to climb, up roughly 7%. Gold’s continued advance has occurred despite both the dollar and U.S. interest rates spiking higher. Since late September the dollar (DXY Index) has risen by nearly 10%, while long-term rates have climbed by almost a full percentage point. The fact that neither trend has disrupted gold’s performance speaks to the changing rationale for holding the metal, with central bank demand and U.S. deficits serving as support.

China keeps buying & deficits keep growing

Back in October, one supporting factor I highlighted was increased buying from China’s and other central banks. Based on data from Bloomberg at that time, China’s central bank gold holdings were roughly 45% higher than in the summer of 2022. That trend continues, with holdings increasing by approximately 4% in Q4 of last year.

One of the reasons China is buying more gold is that they are buying fewer U.S. Treasuries. While much of the shift can be attributed to geopolitical considerations and concerns over U.S. sanctions, nagging questions regarding U.S. fiscal sustainability are a growing consideration, not just for the Chinese but also for domestic investors.

There are still many questions regarding the new administration’s fiscal plans, however the potential extension of the 2017 tax cuts suggests deficits are unlikely to go down, and in the short-term may increase. This is the second factor supporting gold: an ever-growing supply of debt driven by a deteriorating U.S. fiscal position. To the extent investors remain focused on when and how the U.S.’s debt problem resolves itself, gold likely remains in demand as a diversifying asset.

Just don’t expect a day-to-day hedge

One reason not to hold gold is as a short-term hedge against a falling stock market. Recently, gold has been more likely to trade in the same direction as equities. During the past year, the correlation between gold and U.S. equities has been approximately 0.25, indicating that the price of gold and U.S. stocks have a propensity to rise and fall together. For investors, the implication is that, at least in the short-term, gold is not an effective way to protect your equity gains. However, as a store of value for the long-term, gold continues to make a lot of sense.

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Russ Koesterich, CFA, JD
Managing Director and portfolio manager
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team as well as the lead portfolio manager on the GA Selects model portfolio strategies.