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Commodities Corner: Gold is down 15% from its record high but here’s why it may still be key to a diversified portfolio

Two years after gold’s rise to its highest-ever price, the metal doesn’t have a lot to show for it. It has failed to regain ground above the $2,000 level, prompting investors to question its ability to serve as a haven asset.

As some analysts point out, however, gold remains a key asset for long-term portfolio diversification and has outpaced the performance in the U.S. stock market.

Although gold prices have been volatile, and have declined from their highs this year, “many investors are surprised to learn that gold has served as a relative haven during 2022,” says Steven Schoenfeld, CEO at index provider MarketVector. Gold prices are down 3.8% this year as of Aug. 24, but the S&P 500 index

has lost more than 13%.

“ “Many investors are surprised to learn that gold has served as a relative haven during 2022.” ”

— Steven Schoenfeld, MarketVector

Gold futures saw their most-active contract

settle at $2,069.40 an ounce on Aug. 6, 2020, the highest on record. They fell to trade below the $2,000 mark consistently until March of this year, when they posted some settlements above that level. On Aug. 24, prices

stood at $1,761.50.

Gold prices saw two “powerful surges,” in summer 2020 and another in early winter 2022—corresponding with Russia’s invasion of Ukraine, says Schoenfeld. “Gold has since corrected substantially,” he notes, attributing the pullback to a steady rise in interest rates and “vocal articulation” of the Federal Reserve’s monetary tightening policies, which also has driven strength in the U.S. dollar.

The currency, as measured by the ICE U.S. dollar index
has climbed over 13% this year. It touched a more-than 20-year closing high on Aug. 22.

The exceptional strength in the dollar against other currencies raised investors’ confidence in the haven role of the currency “at the expense of gold,” says George Milling-Stanley, chief gold strategist at State Street Global Advisors.

Even so, he thinks investors are “exaggerating the potential adverse impact of higher interest rates” on gold prices. He points out that during the last two periods of sustained Fed tightening, gold prices actually rose strongly, “countering the conventional wisdom that higher rates hurt gold investment because they raise the opportunity cost of investing” in it. For example, during the two years from June 2004 to July 2006, when the Fed raised rates 17 times, gold went up by 42%, says Milling-Stanley.

While he won’t rule out a further test of support for gold around the $1,700 level, he points out that State Street’s base case scenario calls for prices this year to range from $1,800 to $2,000. “Current uncertainties on the macroeconomic and geopolitical fronts could lead prices back into that trade range before year end,” says Milling-Stanley.

Central banks, meanwhile, have continued their purchases of gold. That is consistent with the trend following the 2008-09 financial crisis, says Steve Land, lead portfolio manager of the Franklin Gold and Precious Metals Fund

Global central banks added 180 metric tons to official gold reserves in the second quarter from the first quarter, according to the World Gold Council.

“Growing geopolitical uncertainty has driven central banks to hold more gold and less of other countries’ currencies or debt,” says Land.

Still, gold markets are “hard to predict,” he adds. Gold is a financial instrument that tends to benefit from periods of economic uncertainty or fear of inflation, and it’s a “luxury good,” with most of the world’s annual production of gold sold as jewelry, “which can feel pressure during economic downturns.”

“There are usually a lot of offsetting pressures in the gold market, giving it unique price movements relative to other assets,” he says. That helps make it a “compelling addition to a diversified portfolio.”

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