[Bloomberg Column] The Gold FOMO Trade Is Already Too Late

Unprecedented Rally Draws Investor Attention
Wall Street Recommends Reducing Bonds and Adding Gold
Pattern Resembles Bitcoin
Stocks Outperform Gold Over the Long Term

Nir Kaiser, Founder of Unison Advisors.

These days, simply turning on a podcast inevitably leads to someone recommending buying gold. Asset management firms say, "Clients are completely obsessed with gold," and even friends call to ask, "Is it a good time to buy gold now?" At this point, you don't even need to look at the charts to know: gold prices are soaring vertically, and a sense of "FOMO" (fear of missing out) is sweeping the entire market.

As expected, this year gold prices have recorded one of the strongest rallies since the introduction of the free-floating exchange rate system in 1968. Predictably, the number of Google searches for "how to buy gold" has hit an all-time high. According to Morningstar, by September, more than 35 billion dollars had flowed into U.S. gold-related mutual funds and exchange-traded funds (ETFs). This is the largest cumulative nine-month inflow since 2005.

This naturally raises the question: should investors hold gold? Wall Street seems to have already made up its mind. The same people who never miss a chance to sell a "hot asset" are now recommending gold. Mike Wilson of Morgan Stanley has advised adjusting the traditional 60/40 portfolio (60% stocks, 40% bonds). He suggested shifting half of the bond allocation to gold, restructuring the portfolio to 60% stocks, 20% bonds, and 20% gold.

A portfolio including gold, when calculated with dividends from April 1968 to September this year, achieved an average annual return 0.7 percentage points higher than the traditional 60/40 portfolio composed of the S&P 500 and U.S. Treasury and corporate bonds. However, a closer look tells a different story. Measured by average annual standard deviation, gold's volatility over the past 60 years was more than three times that of bonds. Average annual standard deviation is an indicator used to measure the volatility of an asset. During this period, gold's average annual return was 8.5%, 2.1 percentage points higher than bonds, but its volatility was much greater. Replacing bonds with gold may offer higher returns, but it also means accepting much wilder fluctuations.

In terms of risk, gold is closer to stocks than to bonds. However, in terms of performance, stocks have done much better. Since 1968, gold has shown about 20% higher volatility than the S&P 500, but its average annual return was 2.3 percentage points lower. Ultimately, for investors looking to boost the returns of a traditional 60/40 (stocks/bonds) portfolio by adding gold, simply increasing the stock allocation can achieve a similar, or even better, effect without the need to hold gold.

Gold is more volatile and less profitable than stocks. Moreover, stocks have another advantage in that they deliver more consistent performance than gold. For most investors, 60 years is too long a timeframe. Therefore, short- and medium-term performance is much more important, and that is precisely where gold loses its shine.

Looking at rolling 10-year returns, stocks and bonds outperformed gold in most periods. This is because, unlike stocks or bonds, gold has experienced several prolonged slumps. For example, gold prices remained at nearly the same level in both 1980 and 2007. Such long periods of stagnation are occasionally interrupted by brief and sharp rallies like the current one. In this sense, gold resembles its digital alternative, Bitcoin, more than it does traditional assets.

Of course, not everyone buys gold based on rational judgment. As is well known, many so-called "gold bugs" are driven by fear. Ironically, even setting aside the widely held belief that gold is a "safe haven" despite being much more volatile than stocks, it is worth considering what has happened in the past when gold investments were driven by such fear.

Over the past 20 years, inflows into gold funds surged during the 2008 global financial crisis, the first inauguration of President Donald Trump in 2016, and the COVID-19 pandemic in 2020. However, each time, the rally in gold prices faded as the anxiety subsided, and even considering the recent surge, stocks ultimately performed as well as, or even better than, gold.

This time, many gold investors are worried about a weaker dollar and rising inflation due to tariff policies. However, at least so far, the bond market does not share these concerns. This year, U.S. Treasury yields have actually declined, and inflation expectations remain around the Federal Reserve's target of 2%.

It is still uncertain whether gold can offset losses if the dollar falls. Since 1968, the inverse correlation between gold and the U.S. dollar has been weak (monthly basis: -0.29). While gold tends to rise when the dollar falls, the relationship has not been strong. During this period, there were only three instances of significant dollar depreciation, and gold's performance varied. In the 1970s and the years just before the financial crisis, gold soared alongside a weaker dollar, but from 1985 to 1992, it remained mostly flat.

A more reliable way to hedge against a weaker dollar is to hold a portfolio denominated in currencies other than the U.S. dollar. This is where stocks once again prove useful. By investing in globally diversified companies, you can share in the profits of growing businesses while naturally gaining exposure to a variety of developed and emerging market currencies.

The current fears of a dollar crash and inflation that are supporting gold prices will soon fade, and this rally will subside along with those fears. Of course, if you want to buy gold, you may do so. Just don't expect a windfall. That opportunity already passed, long before this rally began.

Nir Kaiser, Founder of Unison Advisors

This article is a translation by The Asia Business Daily of the Bloomberg column "The Gold FOMO Trade Is Too Late."