Is the 60/40 Portfolio Dead? Rethinking Your Strategy with Gold

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For decades, the 60/40 portfolio – a mix of 60% stocks and 40% bonds – has been the gold standard for balanced investing. The logic was simple: stocks provide growth, and bonds provide a stable hedge. But in today’s market, some prominent voices are questioning if this classic mix is still up to the task.

One of those voices is Morgan Stanley’s CIO, Mike Wilson. As highlighted in a recent Reuters piece, he’s proposing a different allocation for the modern era: a 60/20/20 portfolio.

A New Mix for a New Market

So, what does this new portfolio look like? Wilson suggests a split of 60% equities, 20% long-term treasuries, and 20% gold.

Why the change? Wilson sees equities offering historically low upside compared to treasuries. At the same time, as longer-dated treasuries demand higher yields to attract investors, their traditional role as a perfect hedge is being questioned. This environment, he argues, calls for a more resilient asset to balance the scales.

Enter gold.

Wilson champions gold as the new “anti-fragile” asset, viewing it as a superior inflation hedge to bonds in the current climate.

He sees high-quality stocks and gold working in tandem. The stocks are there to capture upside growth, while gold acts as a hedge when real yields drop – a scenario where both nominal interest rates and inflation are falling.

Context is Key: A Word of Caution 

Now, before you rush to rebalance your entire portfolio, it’s important to add some context. This is by no means investment advice. It’s also worth noting that Wilson has been one of the more prominent bears on Wall Street during a period of significant market gains. The S&P 500 is up around 12% year-to-date and 17% over the past 12 months.

This perspective is about a potential long-term strategic shift, not a short-term market call.

A Golden Rally: What History Tells Us

The discussion around gold is particularly timely. In a parallel to the broader market rally, gold in USD is up over 40% in the last year. That’s a massive move! But what does history say happens next?

Let’s look at the data going back to the 1980s for times when gold has returned more than 40% in a 12-month stretch:

  • On average, gold lost 11.2% in the year that followed.
  • It was only higher one year later 30% of the time.
  • It outperformed the S&P 500 only 1 in 5 times (20%).

This isn’t a prediction, but it’s a fascinating statistic. It underscores the idea that gold’s primary role in a portfolio like the one Wilson suggests isn’t necessarily for meteoric growth, but for its power as a diversifier and a hedge against specific economic risks.

As The End of Year Approaches

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This has been an interesting year for gold and other markets, to say the least. The yellow metal began 2023 at less than $1,800 per ounce and is looking to finish the year well above $2,000 for a gain of over $200 per ounce on the year. This represents an annual gain of over 10% and that could be stretched quite a bit further by the time this latest move higher has exhausted itself. The market is now set to continue into fresh all-time high territory, and certain catalysts could drive it significantly higher in a short period.

The ongoing threat of inflation has the potential to keep the Federal Reserve handcuffed in terms of monetary policy. The central bank has held rates steady at its previous meetings and talk has been increasing of possible rate cuts coming as soon as March. Whether the Fed decides to cut rates at that time remains unclear. What does appear to be clear at this point, however, is that the Fed’s tightening cycle appears to have run its course. Knowing that any additional rate hikes are extremely unlikely at this point may keep gold buyers flourishing and may keep the metal from falling too far during any declines.

The Federal Reserve, inflation, and interest rates are not the only factors that may contribute to gold’s fortunes in the year ahead. The strength of the economy may also play a key role in gold, and recent data suggests that the economy may be weakening. If this trend were to continue into the new year, the Fed could become more aggressive as it loosens policy. The threat of a recession could give the Fed wiggle room to cut rates dramatically, possibly even approaching the zero level before it is done.

The ongoing wars in Ukraine and Israel may also play a role in gold this year. These conflicts have not seen any fresh, major headlines hit the media for some time now. Risks remain, however, that may be factored in by investors until the wars are over. The Israeli/Hamas war has thus far been limited to just those two parties. Should another actor decide to enter the conflict, such as Iran, the U.S. would almost certainly feel compelled to jump in. The U.S. already has significant firepower stationed within the region and could be ready to act at a moment’s notice. Talk of nuclear weapons use by Russia has thus far been just that: talk. Should Russia elect to use nuclear weapons, however, the war itself would change significantly and other nations could decide to get involved to prevent further nuclear weapons use. Any way you slice it, the use of these weapons would be a bad deal, not just for Russia and Ukraine but for the entire world.

The gold bulls remain in firm control of the daily chart. The uptrend currently in place may keep the price of gold moving higher. This, along with a lack of overhead resistance, may allow the metal to not only move higher but to do so in a rapid fashion. $3,000 or even $5,000 gold cannot be ruled out in 2024 and could become a distinct possibility depending on how some of the aforementioned issues play out in the year ahead.

Bulls Building on Gains

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The gold market is higher today as investors spend one of the final trading days of the year in buying mode. The yellow metal has seen some benefit from increasing hopes of Fed rate cuts in 2024 as well as the ongoing threat of inflation and two wars currently taking place. Bets on a March rate cut from the Federal Reserve have been on the rise in recent action, and some key economic data may be spurring on hopes of a cut this winter.

Reports on Thursday showed that U.S. Gross Domestic Product (GDP) increased at a rate of 4.9% last quarter. This figure was lower than the previously forecast rise of 5.2% for the quarter and combined with a slight increase in weekly jobless claims, gave investors reason to worry about the economy and hope the Fed will try to keep it going with lower interest rates. Although the gold market may now stand to benefit as the tightening cycle appears to be done, any rate cuts could have a dramatic impact on gold and could send the metal sharply higher with no overhead resistance to slow it down.

The data stream will play a key role in whether the Fed does start loosening policy. Of course, the inflation rate may also have something to say about what the Fed does or does not do in the year ahead. Although inflation does remain stubbornly high and well above the Fed’s desired target of 2% annualized, the threat of any increases seems to be subsiding. Just how much the Fed could cut rates next year remains the subject of debate, however, and the central bank could try to keep rates elevated for some time to come if inflation remains above target levels.

The Fed, inflation, and interest rates are not the only major catalysts for gold in the year ahead. The two wars taking place, in Ukraine and Israel, could also play a major factor in gold. Both of these conflicts have had a few new headlines in recent weeks. The potential for a spread of nuclear weapons usage remains, however. If Iran were to get involved with Hamas against Israel, the U.S. would almost certainly decide to enter the war as a participant. If Russia were to use nuclear weapons in any form against Ukraine, it would invite other nations to become involved to prevent further use of such weapons. Thus far, the wars have been limited to their original players. Hopefully, they will stay that way until they are concluded. The threat of these conflicts worsening may keep gold and haven buyers busy in the months ahead, however, and could keep the metal from falling too far on any declines.

For the time being, the bulls remain in firm control on the daily chart. Some back-and-fill trade is expected at this point, and any decline in the price of gold may be met with aggressive buying.

A Dovish Fed Sends Gold Sharply Higher

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The gold market rocketed higher on Wednesday, retaking the key $2,000 level as the Fed took a much more dovish tone following its latest meeting on monetary policy. The Fed not only signaled that it is done raising interest rates but also provided markets with strong clues it intends to start cutting rates in 2024. The Fed said it sees slightly lower economic growth next year. That slower growth, combined with easing inflation, may give the central bank the green light to begin easing and even ease aggressively as 2024 progresses.

 

The notion of a dovish central bank was welcomed by financial markets. The stock markets were up big on the announcement, with the Dow Jones, S&P 500, and the Nasdaq all up nearly 1.5% for the day at the close. Gold was just a hair under $50 per ounce higher on the day at the close of electronic trading and has now firmly retaken the $2,000 convincingly. The Federal Reserve and interest rates are likely to remain an area of focus in the months ahead as the new year gets started. Any major changes to the Fed’s outlook or dot-plot have the potential to move markets significantly in the months ahead. Rate projections for the intermediate term have now declined, while the long-term projection remains stable at 2.5%.

 

The Fed and inflation are not the only major factors for gold as the new year approaches. The wars in Ukraine and Israel remain another area of focus for global markets and will likely continue to act as such for the foreseeable future. Although there have been no new, major headlines regarding these conflicts, the risk of an expansion does remain. The threat of nuclear weapons use in the Russian/Ukraine war remains very real and may keep investors looking for safe-haven assets such as gold until the conflict is resolved. The threat of additional actors in the Israeli/Hamas war also remains very real. Iranian involvement would, for example, almost certainly invite the United States to become actively involved. With much firepower already in the region, the U.S. stands ready to take action should the need arise.

 

The next few weeks may see the gold market settle into an uninspired, sideways pattern. With many traders likely taking the remainder of the year off, the metal may need to wait until 2024 gets going before making another significant move up or down. The Bulls seem to have a clear advantage at this point, however, and may look to capitalize on that advantage. The bears will need some significant work done before having anything to get excited about, and their first target will be the $2,000 level. This level is likely to be heavily defended by the bulls, however, and could present an excellent buying opportunity for long-term investors. The path of least resistance remains higher for gold until proven otherwise.

Gold Markets Continue to Rally

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A weaker US Dollar Index as well as a bullish chart posture are propelling the gold market higher on Monday as traders return from the Thanksgiving day holiday. Spot gold prices are firmly above the $2,000 level in mid-morning action and the cloud stay above this key level throughout the session. If the bulls can maintain early day strength until the close today, the market could see a fresh flurry of buying in the days ahead. If the bulls fail to hold recent gains, however, the bears could see it as a chance to pounce and could take the market lower in the near term.

 

The gold market is seeing benefit today not only from a weaker dollar but also from the notion that the Fed may be done raising interest rates. Some recent data has shown tamer inflation figures, and these weaker price pressures may allow the Fed to remain on hold for some time or even to start easing rates again if the economy runs into some serious bumps. As far as the gold market goes, the bulls do not necessarily need lower interest rates to push the market higher. Any further indications that the Fed’s tightening cycle may be over would be sufficient enough to push prices higher. If the yellow metal has been able to crack the $2,000 level with rates at their highest level in over two decades, imagine how high they could potentially go if the Fed did start to cut rates once again.

 

Inflation and interest rates remain key area of focus for the gold market, but they are not the only areas of focus. The war in Israel has been widely discussed over the weekend as a prisoner swap got underway in the middle of a four-day ceasefire. That ceasefire was extended today by another two days which may allow for the peaceful transfer of more innocent prisoners today and Tuesday. Israel has made it clear, however, that it intends to resume fighting once the agreement is over. The violence could even see an uptick as Israeli forces get deeper into Gaza, while non-combatants continue to pay a price for being stuck in the region. Some aid has been able to get into Gaza in recent days, however, the amount of aid that has reached the region is not nearly enough. Whether Israel allows more aid into Gaza is unclear, and if it does not, more civilians may perish.

 

The gold bulls are now in charge on the daily chart. The bull’s next upside target is likely the October highs reached just under $2,040. Beyond this area, the $2,050 level would be next. The bears, on the other hand, will target an initial close below the $2,000 level. A close below this key area may entice more bears to jump into the market and a solid swing lower could be seen, taking the market to $1,950 or even lower.

Fed In No Hurry To Lower Rates

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The gold market is off of its highs of the session in mid-afternoon action Tuesday but is still above the key $2,000 per ounce level. The metal is now struggling to hold above this key level, however and could even finish below it at the end of the day. A failure by the bulls to maintain the rally above this area could result in a downdraft for the market as the bears could become increasingly encouraged. If the bulls can hang on, it could spell more upside for the yellow metal as momentum players and others see it as a sign of strength and look to get involved.

 

The Federal Reserve minutes from the most recent November meeting showed the Fed is in no hurry to begin easing interest rates. The Fed does not seem to be in a hurry to raise rates either, however, and suggested that rates are likely to stay at current levels for longer to battle inflation. The Fed has brought inflation down in recent months through its actions, but inflation is still well beyond the central bank’s desired target of 2% annualized. Keeping rates around current levels may eventually bring price pressures down to normal levels, but it is unclear exactly how long that could take. Given how inflation has remained robust despite an aggressive Fed over the last year or two, it could be some time before price pressures approach the desired target level.

 

The rating committee did acknowledge what it sees as growing risks to the economy. A high degree of uncertainty surrounding the economic outlook was noted, and that uncertainty may keep the Fed from hiking rates even further in the months ahead regardless of how inflation behaves. The economy could potentially enter recession territory if things do not change in the months ahead, and it is unknown how the Fed might react should the economy take a drastic downturn. This may lead some investors to think that lower rates could be seen, but the Fed could also elect to hold strong and maintain its tighter bias towards rates.

 

The gold market may also be affected by the two wars currently underway. The Israeli/Hamas war and the Russian/Ukrainian wars are both raging, with little fresh news to report on. Both conflicts could potentially lead to much larger conflicts, however, for different reasons. The Israeli/Hamas war could drag other players into it, such as Iran. Iranian involvement would almost certainly invite the U.S. to get involved as well. This could lead to a third world war. Discussion of nuclear weapons usage has been on the rise by Russia and others. If Russia were to use a nuclear weapon against Ukraine, it could open up a whole new level of violence and anxiety surrounding the war. The use of such weapons could also invite other nations to use these weapons of mass destruction and a nuclear war could break out, destroying much life and land in the process.

The Calm Before The Storm?

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The gold market is having a quiet day on Wednesday as spot prices are lower by a dollar and change per ounce. The metal took a dip from levels seen earlier in the session after retail sales data came in better than expected. Not only did retail sales data for October beat expectations but the September print was also revised higher. The stronger data may lead more investors to assume that the Fed will not be lowering interest rates any time soon. The higher-for-longer mentality appears to be here to stay, although the Fed could still hike rates even higher if inflation rises or if the data becomes too hot.

 

Interest rates and inflation remain a focal point for the gold market, but they are not the only focal point. The two wars currently happening, between Israel/Hamas and Russia/Ukraine, are also the subjects of attention. The Russian/Ukrainian war has been raging on for some time now, and no end to the conflict appears in sight as of yet. Although there have not been any new, major headlines in this war for some time now, the talk of nuclear weapons being used has been on the rise in recent months. Although the use of nuclear weapons may remain very unlikely, the potential threat of even discussion of them may keep gold and other flight-to-safety instruments well-bid in the months ahead.

 

The war in Israel has already entered what could be its most deadly phase as Israel marches into Gaza. This region is filled with non-combatant civilians and many of them have already been killed in the violence. The lack of power, internet, and even water may only make the situation worse in the region. This conflict has thus far remained between Israel and Hamas. Should others, such as Iran, decide to become involved, it would likely force U.S. involvement as well and the conflict could blow up quickly into a global affair. Fortunately, that has not happened as of yet. The possibility of it could also lend gold a boost, however, and may keep the yellow metal from falling too far if it does decline rather than rise.

 

The gold bulls continue to take a breather following the recent upside for the metal. The metal remains well within striking distance of the next key technical level at $2,000 per ounce. The bulls will likely challenge this area again in the coming days or weeks. A successful upside penetration on a closing basis could set the stage for a much larger rally that could challenge previous all-time highs in a short period. A failure to take this level out, on the other hand, could pave the way for the bears to take control of the market and drive prices sharply lower. Given high levels of inflation and the risks of a Third World War, the bulls may have the advantage.

Gold Rebounds As USDX Dips

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The gold market is seeing a nice rebound on Thursday after some recent selling pressure. Spot gold prices are higher by $14.50 per ounce just after the close of the pit session. Bulls stepped in to buy the recent dip following some technical selling pressure, and friendly outside market postures in both the dollar and crude oil also gave the yellow metal a boost. The day’s gains may have been limited by higher treasury yields, however, as they did tick higher throughout the session. The metal remains a ways away from the next key technical area at $2,000 per ounce. The bulls are still showing signs of life, however, and this area may yet be tested once again.

 

The gold market has been mostly sideways for several weeks now. The war in Ukraine continues to rage on, but without any new, significant news coming out of the region, the gold bulls may be forced to look elsewhere for a bullish catalyst. The potential threat of a nuclear confrontation, however, may keep gold from falling too far if it does decline. The war between Israel and Hamas has taken center stage in the financial media in recent weeks. This conflict has entered what could be a very bloody stage, as Israeli defense forces have marched into Gaza. This region is full of non-combatants and innocent civilians, who have now been without power and internet for some time. Water and food shortages are also a problem in the area, and without some type of aid being able to get into the region, more innocent civilians could perish as a result.

 

In addition to the ongoing global military conflicts, the gold market is also paying close attention to inflation and interest rates. Inflation is down from where it was several months ago, but it remains well above the fed’s desired target of 2% annualized. The stubborn inflation may force the Fed to continue hiking interest rates even further, or it could give the Fed reason to hold rates steady at current levels for longer than expected. Either way, the gold bulls may not come out en masse until the Fed signals that it is done raising rates or that rates may begin to be eased again.

 

The gold bulls remain in control of the market, but not by much at this point. If the bulls are unable to exhibit more power and do it soon, the bears may see an opportunity to pounce and retake control on the daily chart. The two same areas, $2,000 for the bulls and $1,900 for the bears, remain key technical levels that could dictate market direction for the months ahead. A close above or below these levels may signal to market participants that it is OK to enter the long or short side of the market. These momentum players could then drive the market in that direction for an ongoing move that could last several months or more.

Nearing Key Levels on Gold

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The week ahead for gold may be an exciting one. Although the yellow metal is lower on Monday to begin the new trading week, numerous potential issues could drive the metal higher, and do so in a hurry. Following the recent run higher that gold has already seen, some pullback and consolidation are not only to be expected but are also healthy for the market. The geopolitical uncertainty being seen all over the globe right now has put gold into a short squeeze, as hedge funds and large market participants exit short positions with some even deciding to get long once again.

 

The gold market is just below the key $2,000 level. Trading at $1,997 in early afternoon action Monday, the yellow metal may need to retake the $2,000 level in the next day or two or risk vulnerability to more downside pressure. A solid close above this level may set the stage for a bullish rally, as more momentum players may view it as a sign of strength and look to avoid missing the bandwagon. Whatever the case may be, the $2,000 area is of critical importance to the market and will need to be dealt with sooner rather than later.

 

The ongoing war in Israel between Israel and Hamas may keep the market inundated with flight to safety buying interest. Just a few weeks old at this point, the war has already claimed thousands of lives and could enter a phase of increasing death and violence. The ground invasion of Gaza is of critical importance, as this area is home to many civilians and non-combatants. These people have had their internet and power cut already, and could soon run out of other key supplies needed for survival. In addition to the war in Israel, the war between Russia and Ukraine also rages on. This conflict is looking more and more like it could eventually turn into a nuclear conflict. How this could affect the U.S. and other nations is unknown, but the threat of nuclear arms being used may also keep buyers looking to gold for its perceived safety.

 

The price of gold hit a three-month high on Friday. The bulls have retaken control of the metal on the daily chart, on which a fresh four-week-old uptrend now exists. To keep this recent bullish momentum going, however, the bulls will need to take out the $2,000 level in a convincing fashion. A solid close above this area or several consecutive closes above it will be needed to attract fresh buyers into the market. If the bulls fail to do so and this level holds as resistance, the bears may find themselves able to turn the market lower again. The next several sessions may be very telling, therefore, as they could decide gold’s fortunes for the next several weeks or months.

Gold Surges as the Bulls Gain Control

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The gold market is off to a slow start this week as the metal saw a slight decline on Monday. Spot gold is down a few bucks after the close of the day session, in what appeared to be a calmer, more quiet trade. The bulls seem to be taking a break today and could continue to do so in the days ahead. Of course, the market action will likely be largely determined by any new events in Israel or news out of Ukraine or elsewhere.

 

The gold market has had a solid run higher in recent days and a period of consolidation is not unexpected. The recent run-up in gold may now see some profit-taking or some sideways price action before being able to make a sustainable move higher from current levels. The market is taking a breather today not far from the key $2,000 level. This is the area that the bulls just attack and overcome to attract fresh buyers into the market. A breakout above the $2,000 level on a closing basis could signal larger gains ahead, and the yellow metal could find itself headed for previous all-time highs in a hurry.

 

The gold market will take its cues from any new developments concerning the Israeli/Hamas war. Israel is reportedly gearing up to launch a ground invasion into Gaza at any time now. Such an invasion could take the war to another level entirely, as the Gaza strip is full of citizens and non-combatants. Thus far, no other nations have gotten directly involved in the conflict. If that were to change, however, the war could turn into World War III and do so quickly. Any Iranian involvement, in particular, could draw the U.S. directly into the fold. The United States already has two aircraft carriers in the region, including its largest vessel the USS Gerald Ford. These attack groups have the ability to launch tremendous firepower and launch it rapidly. It is unknown if the U.S. has plans to attack Hamas, but if it does, look out below.

 

Any airstrikes launched by the United States could have a dramatic impact on the gold market and other financial markets as well. Gold could see a rapid rise higher as panicky investors turn to it for its perceived safety. U.S. airstrikes or another unforeseen event has the potential to light a fire under gold. This fire could propel the yellow metal far-beyond previous all-time highs and into fresh high territory. With no upside chart resistance to keep a lid on the buying, the bulls could have a field day as gold potentially takes off, possibly never to return to current price levels.

 

The bulls have taken control of the gold market as prices hit a 10-week high last week. The trend is now higher instead of lower, and the bulls will be eyeing the $2,000 in the days ahead.