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I recently received an email from a reader. It included a video that talked about gold and how it’s breaking out against a 60/40 equity and bond portfolio. I love it when people share these things because it gets you thinking. “What are my thoughts?” you ask.

Well, I’ve been talking about the S&P 500’s underperformance against gold for a really long time. So, the idea that it’s beaten the “classic” 60/40 portfolio isn’t anything new to me. 

That flips the question a little bit, making it: Are gold’s outperformance and long-term potential of any real value to an investor? The answer -- and this might shock you -- is an emphatic “no.” Here’s why.

What Gold Is

Gold is not an investment. Again, that may be shocking to you to think about, but remember that investment generates a return. By itself, gold sits in a vault or in a safe. There is a cost in protecting it: vaults, rent, floor space, perhaps any potential threats, etc.

So there isn’t a return -- aside from price adjustments due to changes in the value of the dollar. Now, you can generate a return on your gold by leasing it out. At that point it generates a return as you take risk. Without that function, gold has no potential to generate a return on investment. 

And this is the reality that the gentleman in the video that was sent to me missed: Gold is money.

Sounds harmless enough to say, but it has big implications. The reality is that gold is a bad commodity. It’s soft and heavy. There’s no denying it’s a good conductor, but apart from that, what is it used for? As a result, gold as money has no value except as a medium of exchange and store of value. 

Understand this, gold isn’t an investment that generates returns. On the other hand, let's take a look at what gold isn't.

What Gold Isn’t

Hey, I get it. Right now you’re saying to yourself how well gold has performed this year. What does that prove? Again, you point to the fact that it’s outperformed the 60/40 portfolio by way of saying that it’s generated a positive return. I’m not quibbling over whether gold has generated a positive return, but whether the purchasing power of gold has increased. 

The biggest question is: Why has it outperformed? This is the kicker and the harsh reality. The concept of diversification and index investing has failed over the past 30 years.

If you bought the S&P 500 in 1995 and sold your shares today, does it buy a bigger house? Does it buy more food or other accommodations? The harsh answer is that it doesn’t.

People are up in arms about tariffs, but they have never balked at all of the subsidies that publicly traded companies receive at the expense of inflation. The “Fed put” has helped create trillion-dollar companies that produce a product and pay little in U.S. taxes. We have a significant number of “zombie” companies with little potential to generate positive operating cash flows and that live off capital raised through the equity and debt markets. 

Index investing is like signing up for cable. You get a handful of channels you want, as well as most channels that you will never watch and may not even like. 

Gold isn’t an alternative investment to this failed, engineered approach. It only allows us to see how these entrenched investing philosophies have failed and continue to fail. 

The Burning Question: “Is Gold Undervalued?”

The only hope for a short-run, positive real return in gold is whether gold is undervalued. That’s a big question, but it lies in the utility of gold. 

Has gold’s utility been suppressed and underrepresented in finance? You may have something there. Have financial companies and the bullion banks sought to suppress gold from achieving its role as real money? I think there is something to that, and some are banking on that changing.

If you were to consider all the assets that gold can buy and its current market cap, you’ll see a major short fall. Gold in that context is significantly undervalued -- unless?

“Unless what?” You ask.

Unless the system of rehypothecation and circular logic of banks insuring each other’s risk with little to no underlying capital has any real value. Is gold’s undervaluation a function of trillions of paper assets that have little to no value?

The reality is that it’s likely both, and the potential revaluation of gold may be part of this gain in utility and the inability to suppress its value (not price). 

Here’s What’s Driving Gold Today

Up until “Liberation Day,” the tariffs were a major driver for gold prices. It led to a lot of imports in gold and other metals into the U.S., and prices were rising as inventories surged. However, that was based on the idea that gold would be hit by tariffs, but it wasn't. 

After “Liberation Day,” gold began to be sold. However, that pressure didn’t last long and on April 8, 2025 gold began to find its footing and began to rise even more quickly.

What changed? I’ve been waiting for the Chinese yuan to devalue for a couple months, and it finally began to happen with the reciprocal tariffs. China’s policies have not placed them in a position of strength and like 2015, the yuan is in trouble of devaluing significantly. 

What we’ve seen since is significant volatility is the CNY/USD value. It certainly smacks of intervention, and the selling in the bond market may be reflecting China selling Treasuries and dollars to support their currency. The supply of dollars hitting the market is helping to create the frenzied rally in gold prices. 

Here’s The Big Takeaway

Many who follow gold, who know a lot of details, fail to grasp the simple concept of money. To them, gold is money and an investment. However, it can’t be both. 

The failure of the financial advice given over the past 30-plus years is evident in gold, but gold’s outperformance isn’t a sign that it’s a great investment for the long-term. After all, its real return will be negative when costs are accounted for. Gold does provide a glimpse at the failure of central planning and engineering market outcomes. It’s yielded significantly higher prices for Wall Street and long-term, negative real return for index investors. 

The way forward is a more conscientious approach to investing and owning gold for its purchasing power.

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