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What the gold rally means for investors

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Andriy Onufriyenko | Moment | Getty Images

One helpful way to think about the recent gold rally: it’s a case of schadenfreude. The yellow metal does well when other assets — and the world — are in trouble.

As a result, prospective buyers should proceed with caution, experts say. Be prepared to root against your investment, said William Bernstein, author of “The Four Pillars of Investing.”

“You buy gold and hope it doesn’t go up,” he said.

Earlier this week, the gold contract for April gained $30.60, or 1.46%, to settle at $2,126.30 per ounce, the highest level dating back to the contract’s creation in 1974. On Wednesday, the metal was trading at $2,158.40.

The safe-haven asset has risen for two consecutive months amid ongoing wars in Ukraine and Gaza, the upcoming presidential election, and uncertainty around interest rates and inflation.

Russian President Vladimir Putin recently warned of nuclear conflict and “the destruction of civilization” if other countries sent ground troops into Ukraine. Meanwhile, experts are concerned that Donald Trump would try to pull the U.S. out of NATO if he was reelected, which could raise security risks across the world.

Among the other previous good times for gold: The Great Recession and the start of the Covid outbreak.

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Some Wall Street experts forecast the current rally to continue, anticipating the metal’s value to rise to $2,300 or higher over the next 12 to 16 months.

Should investors take part in the doomsday holding? Here’s what financial experts said.

Gold returns over time are paltry, experts say

Despite brief rallies, the average annual returns for gold far lag stocks and bonds, according to experts.

“When things get volatile, [investors] believe their money will be better positioned there,” said Doug Boneparth, a certified financial planner and the founder and president of Bone Fide Wealth in New York. He is also a member of CNBC’s Advisor Council.

But, Boneparth said, “Gold hasn’t always been the store of value people hoped it would be.”

Indeed, over the last century, gold has risen around just 1% a year, on average.

A $10,000 investment in the S&P 500 on March 5, 2014 — a decade ago — would be worth around $32,700 today. Over that same time frame, an equivalent investment in gold would have only grown to roughly $14,700, according to data provided by Morningstar Direct.

Meanwhile, the gold exchange-traded funds SPDR Gold Shares and iShares Gold Trust produced an average annual return of close to 4% since 2014, compared with around 13% by the S&P 500, Morningstar Direct found.

As a result, Boneparth said, “Gold isn’t really a part of our client portfolios.”

Think of gold as insurance

In some ways, investors should think of buying gold the way they might home insurance, Bernstein said.

The yellow metal typically does well when other financial assets are in the red, and especially when people are losing faith in banks and money.

“When everything else is going down the tubes, gold is the one thing that’s likely going to do well,” he said. “Home insurance also has a high return when you have a fire.”

And just as you pay for the protection of home insurance, you pay a cost for owning gold, he said: those paltry returns in normal times.

Still, some investors may decide to allocate a small portion of their portfolio to gold — experts recommend keeping it under 5% — as insurance against an economic catastrophe, Bernstein said.

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