Among the reasons to purchase gold is the fact that its performance is not closely correlated to stocks when share prices decline. This downside protection—gold rises when stocks tumble—is a fundamental component of any smart investment plan. Normally, bonds also have this quality of offsetting risk in the stock market. So many experienced investors allocate a substantial portion of their non-equity exposure to fixed-income securities. But, as of this writing in mid-June 2021, the relationship between bonds and stocks is decoupling.
The consumer price index rose at its fastest pace in 13 years during May, the federal government reported on June 10, a news flash that would typically drive bond prices down in anticipation of higher inflation and higher interest rates. But that didn’t happen. Bonds rose on the news, along with stock prices. (Stocks climbed on the idea that rising prices are a reflection of strong economic growth that will generate big corporate earnings.)
This is an indication that the bond market now believes what the Federal Reserve has been saying: it will not raise interest rates in the near future because it wants to see higher inflation.
In other words, the bond market at the moment is not playing its normal role of offsetting investor risk in the stock market, which is trading at all-time record high levels and could be vulnerable to sell-offs.
Since bonds are not offsetting risk in the stock market in this environment, it makes sense to increase one’s allocation to gold to ensure one’s portfolio does have a highly reliable hedge against stock market declines.