Russ Koesterich, Portfolio Manager for BlackRock Global Allocation Strategy, recommends investors maintain modest gold exposure despite the precious metal falling 25% from its all-time high in January and trading down 7% year-to-date at $4,074.70 an ounce. The decline stems from renewed U.S. dollar strength, with the Dollar Index up more than 6% since January lows, and rising real interest rates that moved from around 1.65% in early March to 2.20% currently. Gold's historic rally at the start of the year reshaped its role from safe-haven asset to a momentum-driven risk addition in portfolios, while investor focus shifted toward AI stocks experiencing outsized earnings growth, according to Koesterich's latest note reported by Kitco News.
Gold's 25% Decline Driven by Dollar Strength and Rising Real Rates
Gold prices have fallen approximately 25% from their all-time high in January and are down about 7% for the year, with the precious metal last trading at $4,074.70 an ounce, up 1.45% from last Friday's close. Koesterich identified the primary driver behind gold's decline as renewed strength in the U.S. dollar. The Dollar Index has rallied sharply since the January lows, rising more than 6%. Concerns over a global energy shock, a resilient U.S. stock market, and a dramatic reversal in expected Federal Reserve policy have all contributed to the stronger dollar, according to Koesterich.
As the dollar has risen, long-term interest rates have also increased, particularly real or inflation-adjusted rates. Real 10-year yields, derived from the TIPS market, have moved from around 1.65% in early March to 2.20% currently. Koesterich noted that this shift in the rate regime has been another obstacle for gold. He explained that gold's inability to hold gains above $4,100 an ounce continues to highlight near-term downside risks.
AI Stock Preference Diverts Investor Attention from Gold
Koesterich pointed out that gold has fallen out of favor among investors who are now focused on strong earnings and cash flow. He stated that gold "is not an AI stock," highlighting another important headwind for the precious metal. Within the stock market, performance has increasingly been driven by a small set of AI companies experiencing outsized earnings growth.
"As an asset with no earnings, investors are treating gold the same way they're treating slow-growth, stable companies, by basically ignoring it," Koesterich said. He noted that the eventual shift in momentum only partly explains the sharp, months-long correction in gold prices.
Structural Case for Modest Gold Holdings Remains Intact
Despite these headwinds, Koesterich said the precious metal still plays an important role in diversified portfolios. He stated that the structural reasons to hold gold remain intact. Debt and deficits remain at historic levels, debasement remains a long-term risk, and while gold did not work in March, geopolitics have not become any more stable.
"All of which still argues for maintaining a modest gold position in portfolios," Koesterich said. He added that gold's historic rally at the start of the year reshaped its role in investors' portfolios, with the precious metal becoming less of a safe-haven asset due to its strong momentum. "Rather than providing downside protection, gold added risk to a portfolio," he said.
Gold is looking to end the week with modest gains as it continues to consolidate near critical support levels.
FAQ
Why did gold prices fall 25% from their January highs according to BlackRock's Koesterich?
Koesterich identified renewed U.S. dollar strength as the primary driver, with the Dollar Index up more than 6% since January lows. Rising real interest rates, which moved from around 1.65% in early March to 2.20% currently, also contributed to gold's decline. Additionally, investor focus shifted toward AI stocks experiencing outsized earnings growth, causing them to ignore gold as an asset with no earnings.
What is BlackRock's current recommendation on gold investment?
Russ Koesterich, Portfolio Manager for BlackRock Global Allocation Strategy, recommends investors maintain a modest gold position in portfolios. He stated that structural reasons to hold gold remain intact, including historic debt and deficit levels, long-term debasement risk, and ongoing geopolitical instability, despite gold's 25% decline from January highs and 7% year-to-date loss.
How has gold's role in investor portfolios changed since January?
Gold's historic rally at the start of the year reshaped its role from a safe-haven asset to a momentum-driven risk addition in portfolios. Koesterich explained that due to gold's strong momentum during the January rally, rather than providing downside protection, gold added risk to a portfolio. The precious metal has since fallen 25% from those January all-time highs.
