As I write this article midday on Monday (2/24), U.S. equity markets are selling off dramatically. Major indexes are down over 3%—and gold is up close to 2%.

Gold has been in the news a lot recently—including the fact that gold futures posted their biggest five-day gain in eight months last week.

According to MarketWatch, “The metal saw a weekly gain of 3.9%, which marked the sharpest weekly rally for a most-active contract since the week ended June 21, [2019].”

Gold’s April 2020 futures contract closed at $1,648.40 on Friday, up $27.90, or about 1.7% for the day. The contract is trading at $1,677 now, off its earlier highs around $1,690 after moving up around 2% at the open. According to Bespoke Investment Group, this was gold’s “first gap up of 2% or more since November 9th, 2016; the day after the 2016 presidential election.”

With heightened concern over the human and economic risks of the COVID-19 outbreak, in addition to falling bond yields and increased equity market volatility, institutional and retail investors have been bidding up the price of gold for much of 2020. (The latest news on the virus beyond China highlights the fact that it has spread to at least 28 countries, with Italy and South Korea now of special concern.)

Speaking of the economic risks to China and the globe on February 13, Guggenheim Investments wrote,

“The already-terrible human impact of coronavirus clearly has the potential to become tragic, but the economic impact will be significant even if its progress can be impeded. Our estimate is that China’s Gross Domestic Product (GDP) growth for the first quarter could be slashed to -6 percent annualized from an already slow 6 percent in the fourth quarter. That could shave about 200 basis points off of global growth relative to its recent trend.”

Reporting by ForexLive highlighted a note from Goldman Sachs last week related to the virus and the outlook for gold:

“Goldman argues that the outlook for lower US yields and weaker equities ‘creates further upside risks to our gold forecasts.’ … If the virus disruption stretches into Q2, [they say], ‘we see substantially more upside from here—towards $1,850, depending on the magnitude of global monetary policy response. … We see such a rally being driven by the continued search for yield, increased demand for portfolio diversification and higher political uncertainty’ with gold being ‘a strategic allocation to protect a portfolio from geopolitical risks such as the current outbreak, de-dollarization and negative real yields.’”

While Goldman’s analysis is interesting, it is still just an educated opinion. I think two phrases in the statement are more important for advisers and their clients than a short- or intermediate-term outlook: “portfolio diversification” and “strategic allocation.”

While investors may be “chasing gold higher” at the moment, Flexible Plan Investments (FPI) has long argued for a more significant (and continuous) role for gold in portfolios than many investors (and their advisers) are currently implementing, if at all.

Jerry Wagner, FPI founder and president, has written, “For investors looking for further portfolio diversification, gold is a unique diversifier—especially in trying times. Our comprehensive white paper shows that over the past 40-plus years gold has proven to be the best or second-best asset class to hold during seven different investing scenarios that concern investors. And holding gold in even a balanced portfolio has increased risk-adjusted returns over that period.”

I will come back to FPI’s analytical work in a moment, but first I want to look at two notable findings from The World Gold Council’s paper, “The Relevance of Gold as a Strategic Asset 2020.” In a short video highlighting some of the research, John Reade, head of research and chief market strategist says,

  • Since 1971, when gold was released from its peg against the U.S. dollar, its average annual return has averaged 7.8%—higher than cash, bonds, and emerging-market equities.
  • Gold has demonstrated unique characteristics of correlation to U.S. equities since 1987:
    • When the S&P 500 is relatively flat over a weekly period, gold has a very slightly negative correlation—essentially no correlation either way.
    • When the S&P 500 has been especially strong over a weekly period, gold has had a moderately positive correlation—far more than traditional commodities.
    • When the S&P 500 sharply declines over a weekly period, gold shifts over to a moderately negative correlation, unlike traditional commodities. (This is a historical average. As we have seen during market “events” such as today, the negative correlation of gold to equities can be far stronger.)

The FPI white paper referred to previously is a comprehensive analysis of gold’s performance, looking at data over a lengthy period (1973–2018).

“The Role of Gold in Investment Portfolios” presents the history and ongoing discussion about the investment merits of gold, offering many compelling reasons why investors should consider adding the precious metal to their portfolios.

The paper does the following:

  • Examines the performance of gold relative to other asset classes under seven different market environments that typically concern investors.
  • Looks closely at how gold performs under four different classic economic regimes.
  • Analyzes gold’s diversification characteristics versus other asset classes.
  • Reviews the risk-reward characteristics of portfolios with different allocations to gold.

The study concludes, in part,

“Our study demonstrates that adding gold to a typical balanced portfolio has been beneficial across a wide range of allocations in terms of boosting risk-adjusted returns. Over the [40-plus] years studied, the optimal allocation in a balanced portfolio has actually been 20% to gold and 80% to a balanced portfolio, representing an end result of roughly 50% stocks, 30% bonds, and 20% gold. … It appears most investors are likely underinvested in a full range of investment alternatives, and specifically in gold as a long-term asset class. …”

“Investors concerned about capital preservation in times of macroeconomic risk and optimized returns in favorable times should strongly consider gold as a key portfolio element. Over the long term, gold offers the broad benefits of (a) ongoing marketplace demand in the face of limited supply; (b) historic protection from extreme market events, high periods of inflation, and devalued currencies; (c) a time-tested component of portfolio diversification; and (d) liquidity and versatility in terms of the many forms of ownership possible for an investor.”

Please take the opportunity to download the full white paper here.

Also, importantly, please note that FPI is the subadviser for The Gold Bullion Strategy Fund (QGLDX), the first mutual fund that seeks to track the daily return of gold bullion. One of the fund’s important benefits is that, unlike other mutual funds that primarily track gold mining stocks, it is solely focused on the performance of gold bullion.

No matter how an investor chooses to take advantage of the investment benefits of gold, the key point is that an investment in gold should be proactive, not reactive. Many of FPI’s core strategic portfolio allocations possess a meaningful, and diversifying, allocation to gold at all times.

Market update by FPI Research

Equity markets continued to sell off on Monday (2/24), following a dismal performance on Friday (2/21) that put equity markets in the red for last week. The S&P 500 fell 1.25%, the Dow Jones Industrial Average fell 1.38%, and the NASDAQ 100 fell 1.59%.

The most recent market action appears to be related to the continued spread of the coronavirus. Chinese President Xi Jinping made a public announcement on Sunday warning that the virus epidemic is “still grim and complex,” while defending the response to the outbreak as “timely and effective.” Concerns about how the virus will affect geopolitical matters, trade relations, and the environment—not to mention the global economy—persist. As a result, the International Monetary Fund has lowered its global economic growth forecast.

Investors fled to safe-haven assets on Monday (2/24) as equities faced a large sell-off. Gold hit a new seven-year high last Friday (2/21). The 10-year Treasury yield fell to its lowest yield since July 2016. The price of Treasurys trade in the opposite direction of the yields. Both safe-haven assets extended their rally from last week on Monday. Much of the rally in gold in recent months has been because of expectations of central banks cutting interest rates around the globe in response to economic slowdown. Gold typically gains when yields remain low or negative.

With the equity markets selling off last week, our best-performing strategies were our fixed-income or alternative asset class strategies. QFC TVA Gold was up about 4.3% for the week, as our subadvised gold fund gained about 3.9%. Trivantage—Leveraged was also well-positioned, gaining about 2.0% last week with a 70% allocation to The Gold Bullion Strategy Fund (QGLDX).

The strategies that struggled last week were the aggressive equity-based strategies, especially those that employed leverage. Self-adjusting Trend Following was down about 3.2%. Whether STF will become more defensive depends on the upcoming market environment. Nevertheless, STF is up approximately 16.0% for the year, while the NASDAQ is up only 8.2% for the same period.

It may be tempting to make changes to an investment portfolio when this level of volatility arises. The benefit of using Flexible Plan Investments is that our strategies are quantitative, which helps take investor emotions out of the equation. Our strategies are designed with the long term in mind and aim to help investors navigate tumultuous periods such as these.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.  Inherent in any investment is the potential for loss as well as profit.  A list of all recommendations made within the immediately preceding twelve months is available upon written request.  Please read Flexible Plan Investments’ Brochure Form ADV Part 2A carefully before investing. View full disclosures.