Gold has quietly risen nearly 20% year-to-date and has outperformed the S&P 500 index. It is knocking on the door of $2500 per ounce, marking an increase of over $600 from last autumn.
Both the stock market and gold prices have reached historic highs. It has been a great year for broader indices like the S&P 500 and the Nasdaq Composite, with both indices seeing an increase of over 18% year-to-date. Investors’ enthusiasm for sustained economic growth and higher returns, particularly from earnings of large tech companies, has been the driving force behind the upward momentum of these two indices.
Numerous factors can influence gold prices – for instance, fundamental supply and demand dynamics. If a major buyer (such as a country) is increasing its gold reserves, but the gold production is declining, then due to the imbalance in supply and demand, prices may rise. Monetary policies also impact gold prices. Lower interest rates can stimulate spending and weaken the US dollar, thereby increasing gold prices priced in dollars. Generally speaking, the primary catalyst for driving gold prices higher is its utility as a store of value. Essentially, when the economy is under stress and geopolitical tensions escalate, gold can serve as a safe haven.
Historically, it has been quite rare for gold to keep pace with significant rallies in major U.S. stock indices. However, over the past five years, gold prices has surged considerably. While it hasn’t outperformed the Nasdaq Composite Index or the S&P 500 Index, it has fared better than the Dow Jones Index and significantly surpassed risk-free rates or bonds.
The challenge of holding gold for the long term lies in the fact that gold lacks the same growth catalysts as stocks. The value of growth stocks can increase based on potential future earnings. Gold does not have management teams or financial statements. It possesses a certain level of utility but differs in value from commodities like oil or electricity. Nevertheless, gold is globally recognized as a store of value, a status it has held for thousands of years. Gold’s performance record far exceeds that of any company or economy. Gold can be viewed as a way to preserve wealth, especially in countries lacking stable fiat currencies.
In 2024, the simplest way for gold to outperform major indices is if the US stock market experiences a downturn. This could occur due to various reasons such as valuation concerns or major companies failing to meet earnings expectations. Additionally, if uncertainty increases due to factors like interest rates, credit card debt, housing prices, or other economic indicators, or due to geopolitical reasons, gold prices could also continue to rise.
