The specter of war in Ukraine is spooking investors, and some are turning to gold. They may be wise to temper their urge for an all-out gold rush.
The precious metal is often perceived as a safe haven in times of turmoil.
Gold prices surged to multiyear highs in the early days of the Covid-19 pandemic, for example, as cases spread internationally and the stock market cratered. Russia’s invasion of Ukraine on Thursday morning also led gold prices to spike.
The SPDR Gold Shares ETF (GLD) was up 0.68% to $179.50 as of noon ET Thursday — the highest level since November 2020. It’s up 6.6% since the start of the year.
Gold futures also jumped about 0.7%, to about $1,924 an ounce, as of the same time Thursday morning.
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Meanwhile, escalating tensions between Russian and Ukraine have pushed major U.S. stock indices like the S&P 500 to fall at least 10% from their recent highs — a dynamic known as a market “correction.” The tech-heavy Nasdaq opened Thursday in a “bear market,” meaning the index was down over 20% from recent high.
The S&P 500 was down about 0.8% as of noon ET Thursday. It’s down 13% in 2022.
“The global market impact we are experiencing is mostly driven by fear. If the Russian stock market were to go to 0.000, it would not justify the overall global loss of wealth over the last few days,” according to a client note written Thursday by Michael McClary, chief investment officer at Valmark Financial Group in Akron, Ohio.
Geopolitical conflict will have a negative short-term effect on stocks, but the long-term forecasts “largely remain favorable for investors,” he wrote.
Investors who sell out of stocks as a gut reaction to the carnage often do themselves financial harm in the long run.
Investors can feel comfortable allocating a small share of their portfolio to gold, according to financial advisors. But investors should resist shifting a big chunk of wealth into the precious metal right now as a knee-jerk reaction, they said.
For one, gold’s utility as a safe store of wealth during market volatility is widely debated. (Some also see it as a way to hedge against inflation.)
Gold is expected to earn roughly the rate of inflation over the long term, according to Charlie Fitzgerald, a certified financial planner at Moisand Fitzgerald Tamayo in Orlando, Florida. (The Federal Reserve aims for a 2% long-term inflation rate.) Stocks, while volatile, are likely to generate more wealth for investors over the long term.
Stocks also tend to rebound relatively quickly from a correction. Since 1945, investors have taken four months, on average, to recover from a pullback of 10% to 20% in the S&P 500, according to Guggenheim Investments. Of course, it’s unclear how long the current turmoil will last.
But missing big positive swings in stocks, which often occur within days of the initial plunge, can have a significant impact on one’s returns.
For example, a $10,000 investment in the S&P 500 would have yielded a roughly 9.2% average annual return from December 2001 to December 2021, according to J.P. Morgan Asset Management. But that return fell by almost half (to about 5%) for investors who sold and missed the 10 best days over that period; it was almost 0% for those who missed the 30 best days.