Gold vs. Bonds: Wealth Protection Tips from U.S. Money Reserve

Gold and wealth have been inextricably linked for centuries, forming the basis of many civilizations’ currencies before the introduction of paper fiat and remaining a standard against which currency could be measured. Gold remains unique among both precious metals and accepted currencies, standing apart from other asset classes. With gold, many challenges that plague buyers—such as market correlation, demand and supply drivers, and purpose—are largely absent.

Despite recent market volatility triggered by market technical factors, gold remains a top performer, holding a greater resemblance in use and leverage to fiat currencies than it does to industrial metals. Gold can be influenced by factors that drive other currencies, but it can also be more stable, providing a tangible, in-hand representation of monetary wealth.

Growth outlook and interest rates deliver more of an impact than inventory levels, physical premiums, and other technical drivers. Perhaps gold’s biggest attraction is that it can act as a safe-haven asset during market risk-off periods. Currently, with expected returns for bonds plummeting, gold can be a good replacement.

When matched up against bonds, the government-issued gold coins that U.S. Money Reserve offers can be a better way to protect your wealth than uncertain and unpredictable traditional assets, based on a range of factors.

Long-Term Growth Predictions

As the global landscape continues to change rapidly, particularly with tensions surrounding China, the attractiveness of growth-sensitive assets like equities may continue to drop. That could mean that the allure of gold will improve even further, as it tends to perform well during prolonged equity corrections. After all, gold often diverges from financial market’s growth outlook.

Gold is positioned to benefit from wealth creation over the long term as disposable income rises and financial assets increase. This is particularly likely to be true in emerging markets if allocation to gold as a percent of GDP remains low.

According to The Balance, gold does not have an inverse relationship with stocks and bonds like they do with each other; it is not correlated with other assets. This can make it feel safer than confusing stocks and bonds that seem to go up and down in waves.

Liquidity

Longer-term growth expectations reflect both real yields and changes in liquidity conditions across developed-world financial markets. U.S. real yields and gold prices often have a negative correlation, but as traditional assets dip in attractiveness, higher-yielding alternative assets such as gold could rebound.

The U.S. dollar is still closely tied to gold, even decades after decoupling from the gold standard. Since gold can now be traded against the dollar, the strength of the U.S. dollar and the price of gold have an inverse relationship. When the market value of the dollar falls, other currencies strengthen since gold is still generally priced and benchmarked in correlation with the U.S. dollar.

A falling U.S. dollar leads many people to turn to gold as an alternative or safe-haven asset, and the market value of gold tends to rise. In comparison, stocks and bonds based on the U.S. dollar do not have the same relationship and tend to slide with the currency rather than strengthen globally.

The Financial Times began recommending buying gold coins, which are seen as a portfolio diversifier, in September 2019 as a response to slowing growth. This echoed sentiments from Bernstein in favor of gold from February 2019, when the firm’s global quantitative trading strategy group sent a note regarding the “strong case for holding gold.” Global government debt and central bank purchases of gold were climbing to unprecedented levels at the time.

Geopolitics

Gold can also be viewed as a crisis commodity, performing as a hedge against geopolitics. It is no secret that gold is perceived to rise when confidence in local governments is low or when steep equity drawdowns occur. Gold often rallies during periods of heightened geopolitical tension.

Deteriorating fiscal conditions in the U.S. could potentially drive further allocations to gold, which is still a commodity. However, because of gold’s unique properties, the supply and demand drivers for gold can be significantly different than the technical factors that drive other commodities.

Gold is generally considered to be an excellent safe-haven asset, and gold sales tend to spike after global events, such as the killing of Qasem Soleimani or the outbreak of the coronavirus. As the United States has lost its growth leadership and China’s road to stabilization is uncertain, stocks can seem like even more of a risk. Gold has the potential to provide more stability for those seeking to preserve and protect their wealth.

Bond Weakness

The increasing decay of the global political landscape—including Brexit, election rumors, trade tensions, and turmoil in the Middle East—indicates that bond yields may continue to fall. The U.S. yield curve is flirting with another broad-based inversion, according to Bloomberg, amid warnings that this is no longer a localized concern but something that could affect and be affected by the global economy.

The gap between the yield on 3-month and 10-year Treasuries has recently slipped to lows close to -6 basis points. The spread had initially fallen below zero in March 2019 as the trade war raged on and trust and economic conditions deteriorated. It is worth noting that the spread has inverted before each of the past seven U.S. recessions, indicating a real cause for concern.

Lack of yield in gold can cause many to worry about the “cost of carry” compared to bonds, but if bonds take a nosedive, that consideration becomes moot. Since gold does not have credit risk, in certain environments, the opportunity cost of gold can be virtually eliminated, and the cost of carry could be seen as positive relative to sovereign bonds.

For a safe-haven asset and portfolio diversification tool during the global financial upheaval, gold can be much more reliable than bonds. Those entering the market now can preserve buying power and establish themselves with new stability as the bonds market continues to fluctuate. With gold coins from U.S. Money Reserve, you can increase your peace of mind and better secure your future.

About U.S. Money Reserve

As one of the country’s largest distributors of U.S. government-issued coins, U.S. Money Reserve helps clients select the highest-quality and most appropriate precious metals for their portfolios. Have precious metals questions? Call 1-844-307-1589 to speak with a knowledgeable Account Executive for insights and a one-on-one consultation.

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