Steve Feldman is a retired partner at Goldman Sachs and current CEO of Gold Bullion International and Auvere.
As a former partner of Goldman Sachs (GS) and current gold industry executive, it
came as no surprise when dozens of customers and colleagues reached out to me this
week to get my take on the latest research note from GS’s Investment Strategy Group
(ISG). In its note, ISG responds to a number of GS’s wealth management clients who
had inquired about adding gold to their portfolios during these unprecedented times. In
short, ISG stated that GS does “not recommend gold as a strategic asset class in a
I have great respect for GS. Having worked there for 23 years, I experienced the firm in
a way that is not appreciated by most people. GS’s long-standing commitment to both
philanthropy and small business is undeniable. GS has put aside funds to support small
businesses, particularly those owned by women and minorities. Moreover, in response
to the current pandemic crisis, the firm donated to the local healthcare community its
stockpile of masks accumulated post 9/11. As much as I respect GS and cherish the
relationships that I have built with many of its former and existing partners and
employees, I strongly disagree with ISG’s views about gold – particularly ISG’s enduring
supposition that gold is not a strategic asset. Before I refute the thrust of ISG’s
arguments against gold, I would like to provide some context for my own point of view.
How I Arrived at My Own Views About Gold
My relationship with, and appreciation for, physical gold for investment purposes started
in 2008. I was still a partner in the Merchant Bank at GS when the financial crisis hit.
Immediately after the crash of Lehman Brothers, I received a call from an operating
partner I worked with in the farmland space. As a macro trader and historian, he
concluded that the Fed would confront the 2008 financial crisis in the same way that it
had dealt with prior economic crises: it would unleash a barrage of monetary stimuli
into the economy. As a result, my partner felt strongly that we would be well served to
buy physical gold for two important reasons. First, physical gold has no counterparty
risk. Lehman had just failed, and the other major financial institutions would now
require government support in in order to avoid the same fate. Second, physical gold is
the only money that cannot be printed. The Fed’s massive quantitative easing was
about to debase the fiat US dollar in a way that was unprecedented.
In 2008, obtaining physical gold was easier said than done. With some effort, I
eventually secured some bullion; however, my search for physical gold to fortify my
portfolio served a greater purpose. It inspired me to write the business plan for what
would eventually become Gold Bullion International (GBI). The plan set forth a simple
mission: build a business that would allow investors to protect and grow their wealth by
purchasing physical gold as easily and safely as buying a stock or bond. Ten years
later, GBI’s physical precious metals capabilities are now integrated into the platforms of
the largest wealth managers in the United States, two of them even larger than
Goldman Sachs, as well as numerous e-commerce shops.
GBI Knocked but GS Closed the Door
GBI first inquired about getting on the GS platform in 2008. At the time, the price of gold
was half of where it is today — about $850/ounce. I spoke to the senior managers at
ISG. They said no. ISG’s argument against gold at that time? They thought gold was a
“fringe asset”. Undaunted, I kept trying to engage GS in a conversation about gold. I
even reached out to the most senior executives at GS — people who started the careers
as gold traders. Notwithstanding some encouraging responses from time to time, I was
never able to overcome ISG’s intractable stance on gold.
I am not sure why the label, “fringe asset”, matters to ISG. The goal of a wealth
manager should be to have open architecture – one that provides its clients with a wide
array of choices, especially hedges with a long history of efficacy. To be fair, GS
provides its wealth customers with access to a number of non-core assets such as
MLPs, hedge funds, private equity and emerging market bonds. It certainly permits a
wealth customer to invest in ETFs, which is one of the “paper” forms of gold
investment. Gold ETFs are nothing more than an investment in the price of gold, as you
own a share in a trust, but not the actual gold. Yet ISG continues to deny GS’s wealth
customers access to the real thing — physical gold. Notwithstanding ISG’s edict
regarding physical gold, many of GS’s high net worth clients have opened brokerage
accounts elsewhere (as well as direct separate accounts with GBI through “GBI Direct”)
in order to access physical gold.
Even now, as the United States and the rest of the world struggle through dual black
swan events (the COVID-19 pandemic and oil crisis) and are certain to face a global
recession, ISG remains intransigent in its anti-gold position. ISG has doubled down
against gold even as equity and oil values have evaporated. ISG has doubled down
against gold in the face of a looming $5T deficit, a national debt that will soon grow to
$28T, and the Fed’s addition of another $5T to its balance sheet in massive quantitative
easing. ISG has doubled down against gold even though virtually every central bank
has added physical gold to its stockpile in the last 18 months – a sure sign that gold
now shares the stage, alongside the US dollar, as the world’s reserve currency. ISG has
doubled down against gold knowing that mass unemployment and economic uncertainty
resulting from these black swan events will likely result in American investors reducing
stock ownership as they did after the 2008 financial crisis. What gives?
Gold is Money. Stocks are Something Else
Gold is a store of value. It is the ultimate form of money. Unlike stocks, gold is not
supposed to be an income producing asset or a dividend-generating security.
Therefore, comparing gold to stocks is akin to comparing apples to oranges. As ISG
points out, gold is more appropriately compared to the US dollar. Like the US dollar,
gold is a medium of exchange that is accepted around the world. Like gold, the US
dollar pays no dividend.
The biggest difference between gold and the US dollar is that unlike US dollars or any
other fiat currency on the planet, the supply of gold is limited. On April 6th, 2020, the
Financial Times released a projection that puts this difference between gold and the US
dollar in stark relief: the projected Fed balance sheet will increase $5T to $9T by the
end of the year. That balance sheet figure, in and of itself, is nearly as large as the
value of all the gold that exists in the world. Moreover, the Fed will continue to set or
drive interest rates to zero. While the relationship among balance sheets, interest rates
and money supply are complex, the net effect is that the Fed will add more supply of US
fiat dollars into the market, as compared to a virtually fixed amount of physical gold
Consequently, gold will likely maintain its multi-millennia status as the only form of
money that maintains its absolute purchasing power over time. As demonstrated in the
chart below, gold will likely outperform all major fiat currencies as it has for the last 120
With this understanding about the value and function of gold, let’s review ISG’s
arguments against gold:
ISG Argument #1 Against Gold: Gold is Not a Reliable Inflation Hedge.
ISG contends that gold is not an effective inflation hedge. ISG makes this argument
even as it admits that “we do not expect inflation to increase in any meaningful way
when the US and other economies recover from this pandemic.” It is true that inflation is
not today’s concern – especially with oil prices at $25/barrel and demand destroyed by
the global response to the COVID-19 pandemic. Nevertheless, long-term inflation is
difficult to predict, especially when the global economy is in the midst of a dramatic
Putting aside for a moment the risk of short- or long-term inflation, the question remains
whether ISG is right about the relationship between inflation and gold. The historical
record provides a clear answer: gold outperforms rising inflation. Gold even
outperforms periods where a fear (rather than any reality) of rising inflation exists. ISG
admits as much, writing that gold “does have an attractive risk premium above inflation
to warrant an allocation.” But then ISG claims that gold’s “slight edge” over inflation is
not attainable due to physical storage or insurance fees and requirements. As a Wall
Street veteran, I got a chuckle out of that line. If ISG is going to base its aversion to
physical gold investment on storage fees, then I would be remiss if I did not point out
the myriad of fees that are loaded into most investment choices. Let’s assume that a
hedge fund does in fact hedge risk (a dubious claim for many hedge funds, which are
merely leveraged long equities), then hedge fund investors are paying 2% plus 20% of
the profits – a huge multiple of gold storage costs.
The results of a long-term study show that the gold price has historically risen during
periods of high inflation—and the higher the inflation, the more gold rises.
During stretches of inflation that exceed 3%, the return on gold per annum is 8%. That
return clearly outpaces the rise in inflation. In fact, gold’s two biggest climbs in modern
history occurred during periods of high inflation or the fear of inflation. Gold rose 721%
during the high inflation period of 1976 to 1980. It rose 170% from 2008 to 2011, when
most investors feared inflation would rise from QE efforts.
In short, gold hedges inflation. Thus, ISG’s claim that gold does not respond to inflation
flatly ignores the historical record showing that the opposite is true.
ISG Argument #2 Against Gold: Gold is Not a Reliable Hedge Against
Disinflation or a Downdraft in Equities Should Economies Fall into Recession.
First, ISG argues that US Treasury Bonds have served as a more reliable hedge
against equity downdrafts. The study below shows that has not been the case.
While the 10-year Treasury Bond logged a positive return during some of the stock
market’s worst declines, gold has done better in two of the four selloffs by a large factor.
We also saw a similar positive response from gold during the most recent selloff, up
5.6% for the year at the end of the first quarter in 2020, and up nearly 12% on the year
on April 9th.
We agree that 10-year Treasury Bonds performed better than gold for the first quarter in
2020, but how much more room do they have to run given the new low in rates.
Today’s 10-year Treasury yields a meager .73%, compared to 2.48% a year ago and a
10-year average of 4.48%. What happens when 10-year Treasury yields are at, or
under, zero? Can an investor expect the same performance and/or protection from
Treasury Bonds in that environment? When you take that likelihood into account,
wouldn’t it be reasonable to reallocate some of your equity and/or real estate exposure
to gold going forward?
Second, contrary to ISG’s argument, gold has historically offered strong hedging
abilities during recessions. Since the 1970s, the gold price has risen during most
ISG trots out the tired and pedestrian Warren Buffett line that “gold has no utility”. That
is simply not true. Gold serves as money and a global medium of exchange. Gold is
arguably sharing the stage with the US dollar as a reserve currency. Moreover, gold
looks great when turned into jewelry! The irony, of course, is that gold has
outperformed Berkshire Hathaway (class A shares) in each of its past six crashes.
Once again, historical data does not support ISG’s argument that gold is not a reliable
hedge. Indeed, historical data shows that the opposite is true: gold offers nearconsistent
ISG Argument #3 Against Gold: Equities Offer Greater Upside.
ISG reports that “some clients have asked why we don’t prefer gold instead, given the
lingering uncertainty around the virus.”
ISG’s response is based on this prognostication: “… our year-end S&P 500 price target
implying a 20% gain from current levels, compared to an 11% advance for gold based
on GIR forecasts.” While ISG’s prediction may come true, the historical record (as set
forth in the chart below) informs us gold has meaningfully outperformed the stock
market over the past 20 years. Gold certainly outperformed the stock market since the
beginning of 2020, since March 1, 2020, and since last week. The simple fact is that
gold has outperformed equities in the short run, the long run, bear markets and bull
markets. Not bad for a “fringe asset”.
ISG concludes that “a tactical allocation to the S&P 500 is a better long-term use of
clients’ risk budget.” But what about a client’s non-risk budget? Why wouldn’t ISG
consider forgoing some incremental projected return for real downside protection? Are
we really having all that much fun on the roller coaster of equities as it lurches toward
the next crisis? If not, then note that gold has served as a far superior hedging asset
during periods of crisis. As shown in the chart below, gold provided a stronger hedge
than Treasury Bonds in nine of the eleven major crisis events.
Conclusion: Portfolios Are Stronger With Gold Than Without It
Back testing shows clearly that portfolios with gold outperform portfolios without gold.
The 20-year study below reduced the 60/40 stock/bond portfolio in equal amounts by
adding increasing percentages of gold (55/35/10). The results show that portfolios with
a 10% weighting to gold outperformed those with less or no exposure to gold.
This outperformance results from combining a steady long-term return with solid
hedging characteristics. To claim otherwise blatantly ignores historical data and
The Bottom Line: Gold Offers Resilience
Like most Americans, I am an optimist and that optimism allows me to hold a healthy
allocation of equities in my portfolio. But when it comes to protecting myself from the
downsides of equities, I stand away from many of the worn-out and overused narratives
espoused by some of my former Wall Street colleagues. I didn’t achieve a 10% gold
allocation in my portfolio all at once. I legged in over a decade. I accepted less risk in
exchange for a better night’s sleep. Now, a decade after my first investment in physical
gold, I am better off than I would have been had I used that 10% allocation for stock,
hedge funds or private equity.
As I have explained above, an allocation of physical gold in one’s portfolio provides
many benefits but ultimately it provides protection and resilience. It’s time to rethink
portfolio allocation and to discover how gold can both protect and enhance wealth while
helping investors to weather inevitable economic crises. History has been whispering
this very thing in our ears for thousands of years (even if ISG hasn’t been listening).
The author is a retired partner, Goldman Sachs Current Wealth Management Client, Goldman Sachs Private Bank
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine, Markets Media Group or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community.