Tag: Investment Management

All That Glitters: The Appeal of Cash and Gold

With trade issues like tariffs, de-globalization, and a declining U.S. dollar, as well as geopolitical events like the war between Ukraine and Russia, investors and government officials can be forgiven for wanting to seek traditional safe havens such as cash and gold. And, they have lately been rewarded. Money market mutual funds have been yielding 4-5% for several years. Gold is at historic highs, having now reached $4,000 per ounce. If history has taught us anything, however, it is that short-term gains don’t necessarily translate into long-term gains.

Short-Term vs. Long-Term Results

Figure 1 is courtesy of Hartford Funds and shows the growth of $10,000 invested in 1978 in five different asset classes: U.S. large cap stocks (S&P 500 Index), U.S. investment-grade bonds (Bloomberg U.S. Aggregate Bonds Index), a balanced portfolio of 50% stocks/50% bonds, gold (the S&P GSCI Gold Index), and 30-day T-bills (SBBI US 30 Day T-Bill Index). Gold and T-bills (cash) are the two worst-performing asset classes.

The Drawbacks of Gold

Brown Financial has long recognized that gold has two significant drawbacks that make it a less-than-ideal asset class for long-term investing. First, gold is unproductive as it does not generate cash flows such as dividends and interest payments (like stocks and bonds do). Income helps provide a steadier path to long-term total returns. Second, investors often assume that gold prices are stable, but prices are determined mainly by speculation on where prices are headed and thus tend to be volatile. According to Dimensional Fund Advisors¹, from 1970 through May 2025, gold has been positive in just 60% of calendar years, while the S&P 500 Index has been positive in 80%.

Regarding higher cash yields, they typically don’t last for very long, particularly when the Federal Reserve begins a rate-easing cycle. According to Hartford², since 1973, there were eight instances when cash yields dropped by at least 4% over periods ranging from three months to two years; the average decrease was 5.06%. Also, bond fund yields are now higher than cash yields.

The Power of a Balanced, Diversified Portfolio

No matter what happens to gold prices or cash yields, a diversified portfolio will continue to power your financial plan. While assets like cash and gold may perform well in certain conditions, they are only one part of a broader investment strategy. 

If you’d like to learn more about our common-sense approach to investing or how you can put spare cash to work for you, please contact us.

Figure 1: Long-Term Returns for Different Asset Classes – Growth of $10,000 (1978-2024)

Sources:

¹2025.06.05 DFA Above the Fray – Is Gold a Safe Haven?

²2025.06.24 Hartford Funds Client Conversations – Your Juicy Cash Yield Could Disappear Quickly

Diversification from Bonds

Given the volatility of U.S. stocks since the beginning of 2025, it is worth noting the diversification benefits of the fixed income portion of our portfolios, which comprises almost 40% of a 37/63 BFA portfolio. For example, on a total return basis (coupons plus price), our recommended intermediate-term U.S. bond fund has gained 4.6% through the first half of 2025.

Bond prices can lose value over short time frames. Bond prices move in the opposite direction of interest rates, so a shift upward in interest rates, such as from the Federal Reserve tightening, can mean a drop in bond prices. However, higher interest rates also mean higher coupons for newer bonds, which bond funds will purchase as the older bonds roll off their books. Bond coupons have historically made up the largest part of bond total returns, so a bond fund’s total return can still be positive even if bond prices have dipped.

Figure 1, courtesy of PIMCO¹, shows the starting yield (or the average yield to maturity) for various types of bond indices as of December 31, 2021 (before the Fed began aggressively raising short-term interest rates) and as of December 31, 2024. While current starting yields are slightly lower since the end of 2024, they remain near decade highs across most fixed income sectors, with yields of investment-grade core U.S. bonds nearly twice as high as the average yield going back to 2010. Higher returns have historically followed higher starting yields, so the outlook is appealing for a variety of bonds, with BFA clients standing to benefit from attractive return potential in fixed-income investments going forward.

Figure 1: Fixed income sector yields (12/31/2021 versus 12/31/2024) –Yields across most fixed income sectors are high vs. recent history

Source: https://taxfoundation.org/research/all/federal/big-beautiful-bill-senate-gop-tax-plan/

Disclosures:
¹As of 31 December 2024. SOURCE: Bloomberg, PIMCO. Index proxies for asset classes displayed are as follows: Agency MBS: Bloomberg MBS Fixed Rate Index, Munis: Bloomberg Municipal Bond Index, HY Munis: Bloomberg HY Muni Bond Index, Core: Bloomberg U.S. Aggregate Index, HY Credit: Bloomberg U.S. Corporate High Yield Index, EM: JPMorgan EMBI Global, IG Credit: Bloomberg US Credit Index; Private Credit: Market estimates for yield.

* Securitized Credit computed as average of CLOs, CMBS, and ABS from JPMorgan and Bloomberg.
** Municipal yields are the taxable equivalent yield, adjusted by the highest marginal tax rate (40.8%). Unadjusted IG Muni index yield is 3.7% with a change of 264bps compared to 12/31/2021 levels, the unadjusted HY Muni Index yield is 5.3% with a change of 254bps compared to 12/31/2021 levels.

¹ The yield to worst is the yield resulting from the most adverse set of circumstances from the investor’s point of view; the lowest of all possible yields.