Stocks have always been viewed as the more aggressive investment that carry more risk but generate higher returns compared to safer assets like bonds. A traditional portfolio calls for 60% of capital allocated toward equities and 40% toward bonds. Younger investors are now encouraged to be more aggressive toward stocks earlier in their lives due to longer life expectancies and the higher cost of living.
But as most investors know, things don't always go as planned, and sometimes even the most unlikely of assets can outperform. After a sizable run over the past few years, driven by a myriad of different factors, a historically boring asset in the form of an exchange-traded fund is now up 610% since 2000 and is crushing the broader S&P 500 index. Let's take a look.
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The ultimate flight to safety
Several years ago, if you had told many investors that SPDRGoldShares(NYSEMKT: GLD) would surpass $315 and an ounce of gold would surpass $3,400, they might have laughed. But that's exactly what has happened, thanks in particular to an incredibly strong couple of years for the commodity. Gold is up some 26% this year, 43% over the past 12 months, and about 88% over the last five years. It's also crushed the broader stock market since 2000.
How has this happened? Well, there are several reasons, but a big one has actually been building for a few decades -- and that is the U.S. budget. The U.S. has taken on a cascading amount of debt since the turn of the century, fueled by big events like the Sept. 11 attacks, the Great Recession, and the COVID-19 pandemic. In fiscal 2024, the government ran a roughly $1.8 trillion fiscal deficit, meaning it spent that much more than the revenue it collected. Total debt has now surpassed an astounding $36 trillion and interest payments consume an increasing amount of the budget each year, taking away funds that could otherwise be spent on government programs and initiatives.
Bond holders have taken notice and grown increasingly concerned about U.S. finances. S&P Global Ratings downgraded the long-term credit rating of the U.S. in 2011, and Fitch followed that up with a downgrade in 2023, both of which cited fiscal concerns. U.S. bonds are still considered extremely safe and regularly purchased in Treasury auctions, and the U.S. dollar is still considered the reserve currency of the world. However, there is more caution than there once was.
In fact, central banks are buying far fewer U.S. Treasury bonds than they used and instead piling into gold. According to The World Gold Council, central banks collectively purchased over $1 trillion worth of gold in 2024. It's the third year that demand has surpassed $1 trillion and the 15th straight year in which central banks have been net buyers of gold.
A report from State Street in 2024 noted that U.S. Treasury holdings among foreign official institutions fell from $4.2 trillion in early 2020 to $3.8 trillion in early 2024, partly due to foreign central banks diversifying their reserves. The U.S. Federal Reserve also started conducting quantitative tightening, which essentially involves selling bonds to take cash out of the economy. The private sector now holds the bulk of Treasuries in foreign markets, but these investors can be more temperamental and demand higher yield if they deem the U.S. government to be on shaky financial footing.
This seems to be the case amid President Donald Trump's tariff saga, which many believe could hurt growth if tariffs are left in place. Longer-term Treasury yields have shot higher and diverged from shorter-term notes and bills.
Some exposure to Gold is a good idea
Although gold is on a crazy run, I'm certainly not telling investors to sell all of their stocks and pile into gold. Between 1990 and 2020, the Dow Jones Industrial Average still widely outperformed gold and most still believe that equities will win out long term.
However, not only does gold perform well during stressed economic periods, it's also considered a hedge against inflation. Some investors like billionaire Paul Tudor Jones have previously said that the U.S. is essentially going to have to inflate its way out of this current debt situation, which is why "all roads lead to inflation." So, in this regard, it makes sense for a diversified portfolio to have some exposure to gold, perhaps in the form of SPDR Gold Shares.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends S&P Global. The Motley Fool has a disclosure policy.
