2024 has been an excellent year for the broader market, with all the major indexes hovering around all-time highs.
After increasing by just 9% between 2021 and the end of 2023, gold has had a breakout year in 2024. With a 28.7% year-to-date (YTD) return, gold is slightly outperforming the S&P 500’s (SNPINDEX: ^GSPC) 26.6% YTD gain.
Here are some factors that can drive the price of gold, the role gold can play in a diversified portfolio, and different ways to invest in gold.
Gold is a commodity, so the price can move based on several macroeconomic factors.
Lower interest rates can lead to lower capital costs and spur investment in new projects for gold miners, boosting supply.
Central banks may decide to increase their gold reserves, leading to higher demand and prices. According to Reuters, the People’s Bank of China was the largest official sector buyer of gold in 2023. Sustained demand out of China could help drive long-term appreciation in the price of gold.
Gold-based luxury goods and industrial processes that use gold can also lead to higher gold demand.
It’s also worth understanding how gold prices can differ based on the currency it is quoted in. For example, a strong U.S. dollar relative to other currencies can mean a lower gold price in U.S. denominated gold. Here’s a look at the performance of gold in different currencies compared to the S&P 500 over the last decade.
Gold may have underperformed the S&P 500 over the last decade, but not by much in other currencies. The U.S. stock market has been stronger than many other stock markets of developed countries in recent years. For example, using Japanese yen to buy gold, instead of investing in the Japanese stock market, would have been a superior investment.
Assets can do just about anything in the short term, so there’s no telling how gold will stack up compared to a U.S. equity benchmark in a year. However, the S&P 500 will probably continue outperforming gold over the long term if the U.S. economy continues to grow.
The S&P 500 has been an excellent long-term investment because leading U.S. companies have grown in value. From companies that have been in business for hundreds of years to newer, tech-oriented companies, U.S. corporations are earning more money thanks to sustained U.S. innovation, favorable conditions for business, growing populations, and growing global industrialization and consumption.
A bet against the S&P 500 in favor of gold is basically saying that the U.S. will lose its edge on the global stage, or that the factors influencing gold will lead to sustained price appreciation that outpaces the S&P 500. For example, if gold mining slows due to environmental concerns or central banks ramp up a gold stockpile, gold could outpace the S&P 500 even if the S&P 500 puts up solid gains. Still, it’s probably best for most investors to view gold as a small part of a portfolio, rather than as the dominant holding in a long-term plan.
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