Source: Golden Ten Data

Although the price of gold is at an all-time high, many market observers are still fond of it.

Tim Hayes, chief global investment strategist at Ned Davis Research, wrote in a recent report that although the current economic situation is beneficial to the stock market, it may be “more favorable” for gold.

But some investment experts say that even if gold has good prospects, its role in the portfolio should be very different from stocks or bonds.

Since the trend of gold is often different from traditional investments, for some investors, gold may be an appropriate way to diversify their investments, but don't use it as a major component of the investment portfolio. Warren Buffett, a well-known billionaire investor and chairman of Berkshire Hathaway, once proposed this idea.

Different investors hold gold for different reasons. First, it is famous for maintaining or adding value during periods of inflation, although its record in this regard is mixed. On the other hand, if the currency depreciates drastically, gold will be considered a means of preserving value.

In the so-called “safe-haven wave,” investors tend to flee from riskier assets such as stocks and enter safe-haven assets such as gold and bonds. This means investors tend to buy more gold before and during recessions and bears.

Ford O'Neill, co-portfolio manager of Fidelity's Strategic Real Return Fund, which focuses on protecting investors from the risk of inflation, said that makes the recent upward trend in gold prices a bit strange. He stated:

“The sharp rise in gold prices since October last year was definitely not driven by risk aversion in the market. I think we have experienced a 'rebound in all assets', and apparently quite a few assets have performed quite well.”

Essentially, he said, the reason gold is performing well is because investors are pushing up the price of almost everything, whether it's stocks to bonds or cryptocurrencies.

Hayes said that in addition to the rise in gold prices, the weakening US dollar and falling interest rates on bonds have also recently boosted the price of gold. He believes that under lower interest rates, bonds and cash accounts “don't have that much competitive advantage” over gold.

As the Federal Reserve is expected to start cutting interest rates this year, the outlook for gold is becoming more and more optimistic. The lower the interest rate, the lower the opportunity cost for investors to hold gold. “We continue to be bullish on gold,” Hayes said.

One of the major characteristics of gold: it doesn't grow

If you want to add gold to your portfolio, the easiest way is to buy an ETF that tracks the price of gold. This allows you to track the performance of gold compared to other portfolios and saves you from having to spend a lot of money to buy physical gold.

But it's worth noting that whether you keep it in your account or keep coins and gold bars in your safe, gold is an asset that doesn't generate any interest. That's why the world's most famous long-term investors never touch this stuff.

In a letter to shareholders in 2011, Buffett stated that the price of buying all the gold in the world at that time could buy all farmland in the US, and that the remaining money was enough to buy 16 ExxonMobil companies. After a century, the latter will bring a rich harvest and a generous dividend.

Over the past 15 years, ETFs that track the spot price of gold have had an annualized return of 5.5%, while the S&P 500 has an annualized return of 15.3%.

As for fighting inflation, gold's record is mixed. Despite stable inflation since 1988, gold showed negative returns over 18 calendar years, including 2021 and 2022, when inflation was particularly high.

Some investors prefer to hold a small amount of gold because it gives them peace of mind when other assets fall.

William Bernstein, author of the book “The Four Pillars of Investing” (The Four Pillars of Investing), recently stated, “When everything else is going downhill, gold is the only thing that is likely to perform well. In the event of a fire, home insurance also has a high return.”

However, in the long run, the best option for investors may still be to hold assets that will grow and rely on compound interest. As Buffett wrote in 2011:

“Yes, gold has some industrial and ornamental uses, but demand for these uses is limited and unable to absorb new production. At the same time, if you have one ounce of gold forever, at the end of the day you will still only have one ounce of gold.”