Gold Shines Bright: A Closer Look at Its Performance and Investment Strategies in 2024
As 2024 unfolds, the market is thriving, with major indexes reaching new heights. After a modest rise of 9% from 2021 to the end of 2023, gold has surged this year with a 28.7% year-to-date (YTD) return, slightly outpacing the S&P 500‘s (SNPINDEX: ^GSPC) YTD gain of 26.6%.
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This article explores the factors influencing gold prices, its potential role in a diversified investment portfolio, and various methods to invest in gold.
Image source: Getty Images.
Key Factors Influencing Gold Prices
As a commodity, gold prices fluctuate due to various macroeconomic factors. For instance, lower interest rates can reduce capital costs, leading to increased investment in new projects by gold miners, thereby boosting supply.
Additionally, central banks may increase their gold reserves, thus driving up demand and prices. Notably, the People’s Bank of China was the largest official gold buyer in 2023, suggesting that sustained demand from China could bolster long-term gold prices.
Demand is also influenced by gold’s use in luxury items and industrial applications. It’s important to note how gold prices vary depending on the currency quoted. A strong U.S. dollar can lower gold prices in U.S. dollars, which is reflected in gold’s performance across different currencies compared to the S&P 500 over the last decade.
^SPX data by YCharts.
While gold has struggled compared to the S&P 500 over the past decade, its performance isn’t far behind in other currencies. For instance, if investors had chosen to purchase gold using Japanese yen instead of investing in the Japanese stock market, they would have seen better returns.
Gold vs. Stocks: What’s the Better Investment?
Short-term asset performance can be unpredictable, making it difficult to determine how gold will compare to U.S. equity benchmarks in the future. However, if the U.S. economy continues to thrive, the S&P 500 may likely outpace gold over the long haul.
The S&P 500 has demonstrated strong long-term growth due to the increasing value of leading U.S. companies. Established firms and newer tech companies are benefiting from steady U.S. innovation, favorable business environments, and rising global consumption.
Choosing gold over the S&P 500 implies a belief that the U.S. may lose its competitive advantage or that specific factors will drive gold prices higher independently of stock performance. Economic trends, environmental concerns, and central bank activities can influence this scenario. However, for most investors, gold should be viewed as a minor component of an overall investment strategy, rather than the primary focus.
Methods for Investing in Gold
There are numerous ways to invest in gold. Options include purchasing gold jewelry or bullion, though these usually come with markup costs and additional security and storage challenges.
Investing in gold mining companies or gold mining exchange-traded funds (ETFs) which pay dividends is another avenue. However, gold miners face geopolitical risks and must manage costs for economic stability. Notably, Newmont (NYSE: NEM), one of the largest gold mining companies in the U.S., reduced its dividend from $1.60 in 2023 and $2.20 in 2022 to only $1 per share in 2024, despite this being a strong year for gold prices.
Perhaps the easiest way to invest in gold is through a gold ETF, such as the SPDR Gold Shares ETF (NYSEMKT: GLD) or the iShares Gold Trust (NYSEMKT: IAU). These ETFs have custodians that hold gold for investors, charging an annual expense ratio—0.25% for iShares Gold Trust and 0.4% for SPDR Gold Trust—offering simplicity and liquidity benefits compared to physical gold.
Gold’s Role in a Diversified Portfolio
Incorporating gold into a diversified portfolio, alongside equities, bonds, and high-yield savings, can be beneficial. However, relying on gold for consistent passive income is generally not feasible, and gold may be challenging to trade unless through a gold-focused ETF.
Gold’s value can increase over time due to supply and demand trends, as well as central bank policies, while the stock market grows because of economic progress and U.S. leadership. Investors lacking gold exposure might consider adding the SPDR Gold Shares ETF or iShares Gold Trust as foundational holdings without the hassles tied to physical gold.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
