In highly uncertain times like these most experts would advise investment in gold or stocks. So which one is most likely to perform in a pandemic economy?

It will depend on what economic recovery looks like. In a recent survey of CFA Institute’s members, 79% foresee a medium-term recovery over the next 2 or 3 years. 44% believe we’ll have a hockey stick-shaped recovery while 35% expect it to be U-shaped. Only 10% expect a quick recovery.

If we do face a medium-term recovery it could involve a few years of economic stagnation which might lead to asset mispricing, distorted market value and currency debasement and inflation.

Ray Dalio says cash investments could lose more than 2% a year in the case of inflation. He also advised against investing in government bonds for the same reason.

Gold and stocks, however, tend to have more potential for growth in a struggling economy.

Register here to join us for a live investor briefing on Wednesday 15th July 7pm AEST where we will be exploring both sides of the S&P500 vs Gold argument.

The case for gold

Gold has long been considered a safe haven asset. In a recession, it generally retains and even gains value, even if it wobbles temporarily.

Back in March’s sell offs, gold lost 12% but has surged 38% over the past 12 months. It’s now trading at 8-year highs.

Gold’s safe haven qualities depend on a specific set of macroeconomic conditions; rising inflation expectations, falling nominal rates, and a weakening dollar. When the selloffs happened, only the first was true. Since then, inflationary expectations returned to pre-pandemic levels, nominal rates fell, and the dollar lost some value.

Goldman Sachs forecasts another boost of $2000 per ounce within the next year.

“Policy uncertainty aside, we believe debasement fears remain the key driver of gold prices in a post-crisis environment such as this,” the bank said in a note.

Paul Singer is one billionaire investor favouring gold. In a letter to investors, Singer wrote that gold could hit multiples of its current price in the coming years, pointing it out as “the most undervalued investable assets existing today”.

However, the bullish outlook on gold has its critics. Livewire Markets recently published an article that questioned gold’s performance using the GFC as an example. After the GFC, gold hit a record $1921 in 2011 but then slumped.

“It’s a familiar investment thesis in the gold market, and the last time it was tried, in 2008, it fell flat. The most prominent gold champion back then, John Paulson, predicted ‘massive inflation’ which ‘never materialised,’ said the article.

The case for S&P 500

The S&P 500 is often seen as a gauge for the overall performance of the economy. Given the uncertainty, it’s curious to see that despite the March selloffs the index has had a 20% gain, the biggest since 1998. 

However, while huge companies like Amazon, Microsoft and Apple are pushing the S&P Index, many smaller companies are still cheaper than they were in January. 

While the Bank of America forecasts an 11% rally over the next 12 months, its indicators suggest a bearish market, albeit a sustainable one.

“The dividend yield of the S&P 500 is now at a multi-decade record multiple of bond yields whereas the sustainability of dividends has come into question amid the recession, we think a significant proportion of the S&P 500 offers sustainable dividend yields” the bank wrote in a note.

 

It’s worth remembering that a bear market is not necessarily a bad thing, especially one offering dividends. It’s a chance to get some bargains on very good stocks.

While Amazon is a winner in this pandemic, it lost most of its stock value back in the tech bubble burst in the early 2000s. 20 years later, the long-term investors have seen huge returns.

Diversification is the strategy for uncertainty

Only time will tell whether gold or the S&P 500 wins out in a post-pandemic economy. 

Past performance is not a reliable indicator of future performance.

Sources:

• Financial Review: Investors dismiss prospect of ‘V-shaped’ recovery
• CNBC: Ray Dalio: 3 pieces of advice for how to manage your savings in a coronavirus recession
• InvestorDaily: Gold in crisis?
• SmallCaps: Goldman Sachs predicts US$2,000/ounce gold price within 12 months
• Livewire Markets: Gold: The GFC vs COVID-19 and the inflation myth
• FXstreet: S&P 500: Three bullish factors to watch out – JP Morgan
• FXstreet: S&P 500 Price Analysis: Bombs away, perhaps not too far away
• The Tradable: Only Amazon (AMZN), Microsoft (MSFT) and Apple (AAPL) Push the S&P 500: Despite The Bullish Trend, Smaller Companies Are Still Cheaper Than in January
• NY Times: An Epic Reversal of Fortune
• The Guardian: Gold price plunges as confident investors pile out of safe havens