Bloomberg

Businessweek

(USPS

080

900)

August

10,

2020

(ISSN

0007-7135)

H

Issue

no.

4667

Published

weekly,

except

one

week

in

January,

February,

March,

May,

July,

August,

September,

October,

November

and

December

by

Bloomberg

L.P.

Periodicals

postage

paid

at

New

York,

N.Y.,

and

at

additional

mailing

offices.

Executive,

Editorial,

Circulation,

and

Advertising

Offices:

Bloomberg

Businessweek,

731

Lexington

Avenue,

New

York,

NY

10022.

POSTMASTER:

Send

address

changes

to

Bloomberg

Businessweek,

P.O.

Box

37528,

Boone,

IA

50037-0528.

Canada

Post

Publication

Mail

Agreement

Number

41989020.

Return

undeliverable

Canadian

addresses

to

DHL

Global

Mail,

355

Admiral

Blvd.,

Unit

4,

Mississauga, ON L5T 2N1. Email: [email protected]. QST#1008327064. Registered for GST as Bloomberg L.P. GST #12829 9898 RT0001. Copyright 2020 Bloomberg L.P. All rights reserved. Title registered in the U.S. Patent Office. Single Copy Sales: Call 800 298-9867 or email: [email protected]. Educational Permissions: Copyright Clearance Center at [email protected]. Printed in the U.S.A. CPPAP NUMBER 0414N68830

64

beenlargerthantheywereduringthe

financialcrisis.

Peopleareclearly worried. Since

May,pollsconducted by the Conference

Boardshow that consumers’ infla-

tionaryexpectations have shot up to

above6%,from about 4.5% before the

Covid-19 outbreak. Meanwhile, the

futureinflation rate implied by relative

pricesintheTreasury market has been

steadilycreeping up.

Goldcanbe a useful hedge against

equityriskattimes like this, according

toGoldmanSachsGroupInc.History shows that gold out-

performedstocksbya bigmarginwheninflationwent

aboveitslong-termtrend.Goldis experiencinga record-

breakingrally,withfuturesprices briefly touching $2,000

an ounce on July 31. In the Covid-19 era of easy money

and low interest rates, Goldman estimates the price could

rise even to $3,000. All it would take, the bank says, is for

inflation to hit 4.5%, or stay at a lower rate, such as 3.5%,

for a sustained period. We’ve grown so accustomed to

stability in the cost of living that any uptick would send

traders scrambling for gold’s protection.

The 60/40 formula was conceived when bonds and

stocks were still free markets’ agents. But now that the

Fed is buying up everything from mortgage-backed secu-

rities to recently downgraded corporate debt, bonds

have lost their usefulness as a hedge against stocks. A lit-

tle gold might fill the gap. <BW> �Ren is a columnist for

ILLUSTRATION Bloomberg Opinion

BY

GEORGE

WYLESOL

By Shuli Ren

Stocks + Gold =

The New 60/40?

◼ LAST THING

With Bloomberg Opinion

In the past decade, a traditional 60/40

portfolio of stocks and bonds, as rep-

resented by the S&P 500 index and

long-term government bonds, was a

winner. But with U.S. bond yields mov-

ing toward zero or even negative terri-

tory, it may be time to rethink that mix.

One thought: How about swapping out

some bonds for gold?

In normal times, bonds serve as

a hedge against falling stock prices,

because they tend to rise in value when

equities slump in an economic down-

turn.Butthisrelationshipstartstobreakdownwhen

governmentbondyieldsstaydownforlongperiods—

especially when they’re low as a result of central

bank policy.

Moreover, we may be

on the brink of an infla-

tionary period, which

would be bad for both

stocks and bonds. The

Federal Reserve has been

flooding the financial sys-

tem with cash: In just three

months, assets held by

the Fed ballooned by two-

thirds, to almost $7 trillion,

from $4.2 trillion in early

March. Both monetary

and fiscal stimulus have

$7t

● INFLATIONFEARS

Investors and consumers are

growing more concerned about

inflation, according to market

indicators and surveys.

● PUMPING CASH

The Fed’s balance sheet has grown

substantially, from $4.2 trillion in

early March, as it buys all kinds of

debt to support the economy.