So much about investing relates to the different roles that classes of assets perform within a portfolio. Carry individual dollar bills, for example, and you’ll find your assets are extremely liquid and best designed for today’s purchases. Turn those dollars into an investment property, however, and suddenly you have an extremely illiquid asset that should be physically maintained for long-term use. Basic investors need to understand the different roles that each class can play while savvy investors need to understand how different roles affect other asset classes. This cause and effect between asset classes is doubly true for gold investors. Gold is a unique asset, and, for thousands of years, humans used gold as an unquestionable store of value and method of payment. To quote former Fed Chairman Alan Greenspan,
“[gold] has never required the credit guarantee of a third party. No questions are raised when gold or direct claims to gold are offered in payment of an obligation.”
Gold’s universality and stability stand in stark contrast to the qualities’ less resilient assets. Perhaps this is why day-by-day trading price of gold appears tied to so many other investing options—oil, fiat paper currencies, bonds (especially the U.S. Treasuries), to name a few. When the alternatives falter, gold remains a strong haven for investors.
Gold vs. the U.S. Dollar
The easiest relationship to understand is gold versus the U.S. dollar. Once upon a time, the U.S. dollar was a direct claim on gold (to learn more, read our three-part series on the gold standard: Part I, Part II, Part III). Today’s dollar bills are only valuable because the government restricts any competition in money and because the Federal Reserve promises to bail out depositors and the U.S. Treasury. As the dollar loses value, gold becomes more attractive. Look at how the relationship worked out during the first 15 years of the 21st century.
source: Federal Reserve, LBMA
Gold vs. Treasuries
Just as gold enjoys an inverse relationship with dollar bills, it also enjoys an inverse relationship with many assets that are priced in dollar bills. The most notable of these are U.S. Treasury bills, bonds, and notes. The health of the U.S. Federal government balance sheet is deeply intertwined with its ability to borrow money cheaply from the Federal Reserve and from other sources, so more stress on the Treasury Department often means more money printing and, by association, more inflation.
source: Federal Reserve, LBMA
When the government needs to finance itself on printed funds, both the dollar and dollar-denominated federal bonds take a hit. This is great news for gold, even if it’s bad news for anyone carrying around “greenbacks.”
Gold vs. Oil
The relationship between oil and gold is indirect, multifaceted, and very important. Oil, like gold, is a precious and scarce commodity. Since nearly every industrial activity relies heavily on fossil fuels, higher oil prices make it more difficult for businesses to provide cheap goods and services and, by association, consumers suffer. (This is most notably true at the gas pump.) High oil prices are bad for the economy, and a poor economy tends to drive gold prices up. Similarly, any negative economic news tends to create a rush to hoard precious assets—and both oil and gold qualify. If you see oil futures creeping up, there is a chance that precious metals’ prices will follow. Check out this statistical correlation analysis from Market Realist:
Gold Bullion as Stalwart Against Fiat Money and Economic Turmoil
Gold remains the most popular precious metal for commodity investing, both in the United States and internationally. Since many gold bars and coins qualify for Self-Directed IRA inclusion, investors can protect their portfolio while staving off the IRS, too.