Is This Market Being Hedged With Fool’s Gold?

State Street report shows financial advisors leaning on gold to derisk client portfolios.

What does it say about the global economy and geopolitical unrest when financial advisors are hunkering down with increasing allocations to gold in client portfolios?

Perhaps it’s the reality of equity markets hovering around record highs in the third year of a bull market, or the Fed’s strategy of tackling inflation by hinting at interest rate cuts, or it might be those pesky wars and protests.

Whatever reason is being deployed, a new report from State Street Global Advisors and the World Gold Council shows a rising appetite for gold as a hedge against all of it.

According to the report out Tuesday, 87% of advisors currently allocate client assets to gold, and 91% of advisors plan to either increase or maintain their gold allocations over the next 12-to-18 months.

This increasing love for the precious metal is coming as the S&P 500 Index is up nearly 15% from the start of the year, more than 25% over the past 12 months, and more than 85% over the past five years.

Loading more money onto that bandwagon at this point could qualify as performance chasing, especially when the bulk of the performance is coming from a handful of technology companies.

But if diversification or risk hedging justifies a heavier gold ballast, an investment in the asset would not currently qualify as buying low into a less correlated asset class.

GLD Rises 13%

The price of gold, as tracked by the SPDR Gold Trust ETF (GLD), is up nearly 13% this year, nearly 21% over the past 12 months, and nearly 63% over the past five years.

According to the survey results, most advisors are accessing exposure to gold through exchange-traded funds, which can include both direct exposure to the physical metal through GLD or indirect exposure through a gold mining ETF, such as the VanEck Gold Miners ETF (GDX).

Like GLD, GDX is the largest ETF in its category, but hasn’t performed quite as well.

This year, GDX is up 11.4%, and it is up 34% over the past five years.

Asked about their growing interest in gold, 48% of advisors described gold as a “proven diversifier, especially in periods of financial turmoil and economic uncertainty.”

As a store of value, 36% of advisor respondents said gold has “stood the test of time.”

And 35% of advisors said they are getting requests from clients to buy gold, which suggests growing unease among the investing community.

The flipside of all those arguments for allocating to gold when so many other asset classes are pushing toward the sky is also not lost on many financial advisors.

The fact that gold does not pay coupons or dividends was cited as a negative by 54% of advisors, while 28% didn’t like that gold’s intrinsic value is difficult to calculate, and 26% described gold as a “speculative investment.”