3 reasons why gold may outperform the stock market
Gold is a common topic in financial media and for good reason. The asset is a classic safe haven that's prized for its lack of volatility when the market faces choppy waters. In some cases, gold outperforms the overall market. With gold investing recently hitting an 11-year high many are wondering if gold will outperform the stock market in the weeks and months ahead.
There's a strong argument that now is the time to invest in this safe haven commodity. Some even suggest that gold will beat the market over the next year.
Check out your gold investing options here now to see how you could benefit.
3 reasons why gold can outperform the stock market
Gold is a safe haven commodity. That means investors look toward gold when things aren't quite right in the overall market. As a result, you can often expect gold to outpace the market when market conditions are poor. Here are a few things happening right now that suggest gold has a strong chance of outpacing the market in the year ahead:
Economic concerns
There are several factors that play into economic concerns at the moment, but one of the largest is inflation. Under optimal conditions, the inflation rate in the United States should sit at around 2% annually.
In September, prices were up 0.4% month-over-month and 3.7% year-over-year. Sure, that's down from the more than 9% inflation rate seen in June of 2022, but it's a far cry from where it needs to be.
Should inflation continue at this rate, gold would be in a strong position to outpace the overall market. "If you are looking for an inflation hedge with a safe haven asset," JB Becket, founder of Beckett Financial Group says, "a small investment (less than 5% to 10% of your total net worth for most investors) in gold could be worth considering for the right investor."
Add gold to your portfolio to hedge against inflation today.
Interest rate changes
The Federal Reserve has been increasing the federal funds rate, the basis for loan interest rates, in an effort to combat high inflation rates. Most believe that the Fed will raise rates at least one more time this year.
Some argue that increased interest rates will send gold in the negative direction, citing an inverse relationship between gold and interest rates. But that general concept isn't always right. In fact, the relationship between gold and interest rates throughout 2023 says this notion is incorrect. The Fed increased rates four times so far this year, yet gold prices are up more than 6% year-to-date.
There are several factors that play a role in the price of gold. Even with rising interest rates, inflation remains problematic. So, if interest rates rise again, thus rocking some traditional investment values, gold could actually improve.
Stock market overvaluation
You can't compare gold's potential returns to the stock market's potential returns without mentioning the stock market. That's where things get more interesting in the argument that gold is likely to outperform the market. There's a strong argument that the market is overvalued.
Ultimately, the market moves through a series of overreactions. When the bulls have control, they push prices as high as possible - typically far higher than they should go by any measure of fair market valuation. When the bears take hold, they do the exact opposite. So, overvaluations are typically followed by steep declines leading to undervaluations which are followed by impressive gains leading to overvaluations.
No matter what valuation metric you use to assess the valuation of the S&P 500, Dow Jones or the Nasdaq Composite Index, you're going to find an overvaluation. At some point a correction will have to take place, driving prices down.
This will likely lead safe haven investors toward safety assets with gold being one of the most popular options. So, not only is gold likely to benefit from economic uncertainty and monetary policy changes, it may also benefit from a correction in the very market we're comparing it to.
The bottom line
While there's no definitive way to tell if gold will outpace the market, when you dig into the current state of the economy, monetary policy and the stock market as a whole, there are clear signs that point to gains in gold ahead. And with few opportunities to make and protect your investments currently, a gold investment now makes sense for many investors.
