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Scott Schamber
August 13, 2020

Gold Has No Role in Your Portfolio... Really?

According to Sharmin Mossavar-Rahmani, chief investment officer of private wealth management at Goldman Sachs, gold is overpriced and has no clear role in the portfolios of wealthy clients. She thinks gold is only appropriate if you have a very strong view that the U.S. dollar is going to be debased. It’s a very simplistic view, as is the rest of her reasoning.

During an ,,interview on CNBC last Thursday (July 30th, 2020), Ms. Mossavar-Rahmani explained how she considered two factors when thinking about gold strategically and tactically.

First, she argued that “gold isn’t a great deflation hedge, doesn’t generate any income, and isn’t tied to economic growth and corporate earnings, so it fails the strategic hurdle as Goldman’s wealth management crew.”

She went on to assert that gold is a hard case to defend tactically, unless investors hold the perception that the current bout of weakness in the U.S. dollar is the start of a more severe downturn and a possible dethronement of the USD as the No. 1 reserve currency in the world.

She concluded her deep analysis with something along the lines of: “All this excitement and brouhaha about gold is not something that we buy into.” Let us take a closer look at all this professional investor wisdom.

Gold not a deflation hedge…?

We have seen the global economy in a deflationary state for several years now. Even though central banks have been employing a level of quantitative easing unseen ever before, deflationary forces have trumped inflationary ones. We’ve discussed this at length in a post written in May by Frank Suess: ,“Deflation or Inflation? Take Your Pick...”

At the time, our conclusion was as follows: “Until velocity picks up, or other factors result in higher interest rates, we doubt that we will see an end of a deflationary scenario. Chances are quite high that deflation will reign supreme for some time. That does not mean that inflation should be ruled out. We know for sure that literally the entire developed and much of the emerging world is going through a monetary and fiscal expansion like never before. In a way, it is like a universal basic income, financed by Modern Monetary Theory. Ultimately, that is inflationary by nature.”

10-Year Gold Price in USD / oz (as of Sunday, August 2, 2020)


Gold stands at a record high close to US$2’000 as I write this post! From 2016, when gold entered its current bull market, that represents a gain of over 80%! Why would an investor not like that kind of asset in his portfolio? Clearly, our clients have been very satisfied with our allocation of precious metals over the past years.

Possibly, this has gone unnoticed by Ms. Mossavar-Rahmani. Possibly, she has not heard that gold has been rising during an extended period of deflation. And, historically, there are many such periods. This viewpoint seems a bit removed from empiric reality. Moreover, it is too simplistic. A lot of variables flow into the price of gold.

Another thing that appears to have escaped this CIO’s attention is that we are now observing the first signs of rising inflation. So, even if gold were not a deflation hedge, her argument would imply that gold is therefore a hedge against inflation. Has she not noticed that either?

Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold. ~ Leo Tolstoy

Just last week, our CIO Dirk Steinhoff (whom I would clearly choose without hesitation over the likes of Ms. Mossavar-Rahmani…) published a very noteworthy post titled ,,“Inflation Could Be Arriving Sooner Than We Thought”. The post makes a number of critical observations:

“All that central banks have achieved over the past ten years was the creation of a lot of non-bank debt. Their actions kept interest rates low, which inflated asset prices and allowed companies to borrow cheaply through the issuance of bonds. Not only did central banks fail to create money, but they created a lot of debt outside the banking system.

This led to the worst of two worlds: no growth in broad money, low nominal GDP growth and high growth in debt. Most money in the world is not created by central banks, but by commercial banks. In the past ten years, central banks have never succeeded in triggering commercial banks to create credit and therefore to create money.

Now, politicians have discovered the money faucet. They are guaranteeing loans, so that commercial banks are willing to make loans to business. Thus, this money will be impacting the economy and it will be hitting the streets.

That, in and of itself, could be considered good news. But here is the catch: governments will probably recognize this as their way out of debt. They will bypass central banks and they are very unlikely to act with moderation and care. Chances are that, by the time they try to stop the tide they created, it will be too late. Inflation, and high inflation, will have taken hold.”

Gold is not tied to economic growth and corporate earnings? So?...

Possibly, the arrival of rising inflation expectations was missed by the Goldman CIO as well. However, she cannot possibly have missed the fundamental economic issues and the impact of the COVID-19 lockdowns all over the world.

She argues that gold is not tied to economic growth and corporate earnings, that it does not produce income. This argument too seems a little detached from reality. First, economic growth and corporate earnings are currently not the brightest, and the recovery is, at the very least, a bit uncertain. Gold is known as a hedge against a crisis. And aren’t we in one right now? Or am I missing something?

Have a look at the price of gold during the period from 2000 to 2012. That period included both substantial economic growth, as well as one of the worst financial crises. To base your view of gold on such simplistic views completely misses the essence and complexity of how this world, and asset price movements with it, work and develop.

,Gold only goes up if the dollar goes down?...

Gold is an asset. As such, it has intrinsic value. However, that value can fluctuate over time, sometimes in a volatile fashion. And it is true, in the short-term, when the value of the dollar increases relative to other currencies around the world, the price of gold tends to fall in U.S. dollar terms. It is because gold becomes more expensive in other currencies. As the price of any commodity moves higher, there tend to be fewer buyers, or in other words, demand recedes. Conversely, as the value of the U.S. dollar moves lower, gold tends to appreciate, as it becomes cheaper in other currencies.

Once again, this view is far too simplistic. While gold typically has an inverse relationship to the dollar, it is not always the case. Driven by global supply and demand, there have been times when gold and the U.S. dollar have risen and fallen together. This is clearly shown in the following chart that compares the gold price with the daily closing price for the U.S. dollar index.

Gold Price (US$/oz) vs. US Dollar Index

Source: Bloomberg Data, BFI Infinity Inc.

Many reasons to hold gold

Contrary to the vacuous gold-bashing of this Goldman CIO, there are of course many reasons to hold gold today and strong arguments why gold is a good asset to hold in your portfolio under the current conditions. Here are just a few reasons why our clients are VERY happy with their physical and allocated gold holdings:

  • Just look at the price chart: The gold price, if any of Ms. Mossavar-Rahmani’s arguments were relevant, would not have performed as it has. Clearly, her line of “thought” is faulty.
  • Monetary and fiscal quantitative easing on steroids: Central banks and governments around the world have gone on a COVID-19 spending-and-borrowing spree to support growth. That creates a lot of risks that may cause serious problems in the economy and even society at large. But those problems will be bullish for gold, a haven in times of crisis.
  • Social and geo-political tensions on the rise: Equally, the current social tensions are partly responsible for the wild protests since late May — another source of unease that supports demand for gold. The wealth divide may only get worse. Stock gains, artificially pushed by unprecedented monetary expansion, have disproportionately benefited the wealthy. This, combined with other factors, has revived and accelerated the slow progression of Marxist ideology in the West. That too does not bode well for the future. Again, this supports the case for gold as a crisis hedge.
  • Inflation on the way: As discussed above, huge amounts of monetary AND fiscal dollars are chasing a shrinking amount of goods; this drives up the dollar price of those goods. Gold benefits from that scenario as a hedge against the depreciation of paper currency.


Ms. Mossavar-Rahmani must be a very intelligent and experienced professional. She would not hold the position she has at Goldman Sachs otherwise. This makes it even more surprising, if not shocking, that someone like her could operate on such simplistic slogans and contradictory viewpoints.

She cannot possibly be that ill-informed and ignorant. If so, I dread to think of what her client portfolios must look like.

All this of course also begs a few questions: What is the motivation behind these remarks? Might she be looking for excuses? Obviously, she did not allocate any part of her clients’ portfolio to gold. Was she not alert and smart enough to recognize how extremely beneficial gold could have been to her clients’ portfolios? Is her salary and bonus possibly so strongly tied to brokerage revenue in stocks and bonds that she would not hold an asset class that does not pay HER any earnings?

Whatever her agenda may be, this serves as a great reminder of how important it is for investors to do their homework and due diligence before selecting their investment advisors and partners. Checking their track record and verifying that their interests are aligned with their clients' is an essential first step in establishing a successful professional relationship.

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