‘Markets seem to be losing their faith in Jerome Powell,’ strategist says

State Street Global Advisors Chief Gold Strategist George Milling-Stanley joins Yahoo Finance Live to discuss the benefits of investing in gold, market uncertainty, Fed expectations, and the outlook for investors.

Video Transcript


RACHELLE AKUFFO: The search for safe havens turns to an old friend-- gold. Investors taking a closer look at the precious metal as a traditional safe-haven asset as bank instability, inflation, and, of course, rising rates add to the gloom. But is all that glitters good for investors?

Here with more, George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors. Good to see you, George. We're seeing gold, seeing some gains today, near the highs of the day at the moment. What do you attribute this to? We know that people have been looking for safe havens. Is this the moment for gold?

GEORGE MILLING-STANLEY: I think so, yeah. I think, you know, we live in very, very uncertain times, Rachelle, and they just seem to be getting more uncertain as we go. I'm a little concerned that the markets seem to be losing their faith in Jerome Powell and what he says. Powell, I think, has made it pretty clear that he sees no possibility of a rate cut in 2023, and yet I understand that the markets right now are actually betting on a rate cut as soon as June of this year.

That seems to me kind of crazy. I think that's leading to some exuberance in some sectors of the stock market, which I frankly don't think are warranted. And I think that we have a lot more uncertainty coming. And if the markets are starting to lose faith in the people who are controlling interest rates, then I think that things are just going to get worse from here.

That means that people-- more people will need more safe havens. Gold will come into its own when that's the situation.

RACHELLE AKUFFO: And in terms of how it benefits a portfolio, I mean, you list a couple of things-- risk management, capital appreciation, wealth preservation. Break those down for us.

GEORGE MILLING-STANLEY: OK. Look, to me, the promise of gold for investors has historically always been of a dual nature. Over time-- and I think that's the only way to measure the performance of any portfolio asset-- and gold, in particular. Over time, gold can help to enhance your returns. And over time, gold can help to reduce the volatility of a properly balanced portfolio.

In other words, over time, gold can help to enhance your risk-adjusted returns or improve your Sharpe ratio, as the brokers call it. I think that that's really the key from this point of view. While it's doing all those things, it is also, as you say, it's adding diversification, and I think that this is really very important for investors. A small allocation to gold within the context of a properly balanced portfolio has always made sense as a strategic allocation.

And I think, from time to time, it also makes sense as a tactical allocation. I'm still looking at that one. But the strategic benefits of gold, I think, have been demonstrated many, many times and will continue to be.

RACHELLE AKUFFO: I mean, and even with some volatility, gold futures still up 15% over the last two years. How would you compare its performance to the S&P 500 when people are trying to decide where to put their money, knowing that, perhaps, the returns may not be as great, though, if they're going with gold?

GEORGE MILLING-STANLEY: Look, I'm not saying that everybody should sell all of their stocks and put all their money into gold. That's absolutely not the way that we look at gold at State Street here. But I do think that a small allocation in a properly balanced portfolio can make sense. The way that I like to look at gold's performance-- over the 20 years or so of this century, you know, gold opened this century at $255 an ounce.

So seeing a price today at $1,965, that's a pretty good gain. That's actually somewhat better than the S&P 500 did over that same period. And I would also make the point, when you talk about volatility, over time, gold has shown that it is marginally less volatile than the S&P 500. That really says something important.

The S&P 500 is an index, and an index, by definition, is always going to be less volatile than the individual things that make it up. Gold is just an individual asset, but it has, over time, been marginally less volatile. It may only be one or two percentage points, but it's one or two percentage points in the right direction.

If gold can reduce my volatility and has the potential to enhance my returns, then I'm going to want a small allocation to that in my portfolio as a strategic asset.

RACHELLE AKUFFO: I mean, and that certainly makes sense. I mean, usually, people, you know, flock to bonds. But when you have an interest-rate-sensitive device like bonds, that's not the safe haven that people look to. So, then, in terms of, perhaps, any other sort of risks that do attach to gold, if it's not interest rates, what are some of the risks that people should be aware of, at least keeping mindful of when they're investing in gold?

GEORGE MILLING-STANLEY: Well, look, I think, you know, one of the things that can happen and has happened at various points in history-- not every time, but on occasion when we've had a sudden drop in the stock market-- and I think if we are going to move into a recession this year, which is still very much on the cards, then I think that we might well see that sudden drop in the stock market. That means that anybody who's actually bought stocks on margin is going to be faced with calls for increased margin, as the value of their holdings has declined.

Rather than selling out of those holdings, those investors who were savvy enough to own some gold have, in the past, been able to sell a little bit of gold in order to meet the margin calls on their depressed equities. But typically, what has happened-- and this has happened every time-- we've had one of these big moves down in equities. Whether it's 2008, whether it's 2020, we go all the way back to 1987, we've had an awful lot of sudden moves down, and gold has benefited.

Initially, gold may well go down with equities on this margin-call liquidation, but typically, when investors see that gold has done what they-- has done what exactly they bought it for, then they will reup their gold holdings as quickly as they can. That has generally been the case. Whenever we've had a sudden downturn in the stock market, stocks have remained depressed for months, or even years. Gold typically has recovered within months, or even weeks.

And I think that that's an important thing for investors to bear in mind. So that's one of the risks. But don't be fooled just because on a temporary basis, stocks and bonds-- stocks and gold may go down together. It doesn't necessarily mean that they're correlated. I think that what we've seen in the past is that there's a very different kind of relationship.

There's an asymmetrical relationship between gold and stocks. And I think that I would expect gold to get better if, as I expect, stocks will start to weaken.

RACHELLE AKUFFO: And certainly, an important distinction there when we do see, perhaps, the prices going down at the same time. George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors. Thank you for joining me in this morning.