Although traditionally seen as a safe-haven asset, we believe there are many reasons to support an allocation to gold in diversified portfolios.

As the pace of growth in the global economy slows and interest rates continue to fall, many investors are flocking to gold. According to the World Gold Council (WGC), holdings in gold-backed exchange traded funds (ETFs) hit an all-time high in the third quarter of 2019, with quarterly inflows at the highest level since the first quarter of 20161.

The precious yellow metal is traditionally viewed as a safe-haven asset with a low correlation to bonds and equities. But could gold start to lose its luster with global recession fears fading from the horizon?

Investors tend to buy gold when the going gets tough. Prices rose for much of 2019 against a backdrop of slowing global economic activity and geopolitical uncertainty, including ongoing trade tensions between the United States and China.  The sharp decline in U.S. government bond yields (with the 30 year U.S. Treasury yield dipping below 2% for the first time) made headlines over the summer, and as of the beginning of September, gold prices had risen by 21% since the start of the year.

Yet as we approach the end of 2019, economic data seems to be stabilizing. China and the United States reached a phrase one trade deal; the Federal Reserve looks to have completed its round of ‘mid cycle’ interest rate cuts. As these dynamics have played out, gold prices have come off their highs, although they are still up around 16% on the year. 2

While the macroeconomic backdrop suggests a more conducive environment for risk assets (such as equities) going forward, this doesn’t mean that gold can’t or won’t continue to perform well. It is worth noting that over the past 5, 10 and 20 years, gold has had nearly zero correlation with equities.3 By adding an uncorrelated asset to portfolios, we would highlight that investors can help lower overall risk and improve risk-adjusted returns. Gold has delivered positive returns during periods when equity markets have been both rising and falling.

Our constructive view on gold continues to be supported by a number of factors:

  • Recession risks may be moderating, but they’re not negligible. Although global growth revision indices have stopped falling, they’re not yet showing any sign of a material pickup. Our favored measure of recession probabilities continues to remain relatively elevated, as it has all year. In addition, trade tensions may have abated for now, but in the longer run, we believe that it will be difficult for the US and China to reach a broad-based deal. As gold is a safe-haven asset, we think an allocation to gold can help ballast a portfolio if and when we see more bouts of volatility.
  • Interest rates are going to be low for longer. The Fed may be on hold, but we feel confident that central banks around the world are not going to hike rates any time soon. This is likely to keep a cap on how high yields can go. Low interest rates (and crucially, lower real yields) make for a lower opportunity cost of owning a non-yielding asset such as gold.
  • There’s structural demand for gold. Central banks continue to buy a lot of gold. According to the WGC, year-to-date purchases in the third quarter were over 12% higher than last year 1, translating to a near-50-year high for total purchases. The bulk of these come from a few large buyers, but 14 central banks said they have added to their gold reserves by one ton or more. This continues a trend of purchases by a broad spectrum of emerging market central banks. These buyers are purchasing gold for long-term structural reasons – not to catch the next $50 or $100 move. As a result, we think this demand will help support prices in the longer term.

Our overall conviction on gold has not changed despite our slightly more modest return expectations.

Gold is roughly fairly valued according to our model, but our expectation for real yields to remain low and the US dollar to weaken slightly can support a further move higher. We expect gold to be near $1,550/oz (range $1,500-1,600) at the end of 2020.

Gold may continue to offer uncorrelated returns, which can help reduce overall portfolio risk especially at this stage in the economic cycle.

If you already hold an allocation to gold, we believe you may want to continue to do so. If you’re interested in finding out more about the benefits of investing in gold and how you can incorporate an allocation into your portfolio, please speak to your J.P. Morgan representative.

Investments in commodities may have greater volatility than investments in traditional securities. The value of commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in commodities creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.


1 World Gold Council, Gold Demand Trends Q3 2019
2 Source: Bloomberg Financial L.P. Data as of December 12, 2019.
3 Source: Bloomberg Financial L.P. Data as of November 12, 2019.