🥛 Is gold the new bonds? 🥇

GM. This is Milk Road Macro, the newsletter that’s here to help you rethink your portfolio before your retirement plan turns into a horror story.

Here’s what we got for you today:

✍️ Here’s why gold could be a direct attack on bonds
🎙️ The Milk Road Macro Show: Why The Housing Market Is Headed For Another Crisis w/ Melody Wright
🍪 The price of gold continues to melt higher

Prices as of 8:00 AM ET.

HERE’S WHY GOLD COULD BE A DIRECT ATTACK ON BONDS

A paradigm shift might be happening in financial markets.

For decades, money managers have recommended a portfolio of 60/40.

60% equities, 40% bonds.

But now - things might be changing.

A top investment boss at Morgan Stanley is re-writing the rulebook - recommending a 60/20/20 portfolio.

60% equities, 20% bonds and 20% gold.

And he’s just the latest of many prominent figures making similar statements.

These sentiment shifts could have big implications.

So, what’s going on?

What does it all mean?

And why is this important?

Let’s take a look…

So what exactly is this Morgan Stanley guy saying?

Last week, Morgan Stanley Chief Investment Officer Mike Wilson recommended a portfolio strategy containing 20% gold.

This isn’t just some random guy.

This is a straight-laced “suit and tie” Wall Street “big dog” - so his opinions carry weight in circles that manage large amounts of capital.

Wilson now favors a 60% allocation to equities and 20% each to fixed income (bonds) and gold.

The traditional 60/40 portfolio counts on moves in the two asset classes to offset one another.

The traditional wisdom is that stocks strengthen amid economic optimism, while bond prices rise during turbulent times.

But this hasn’t been the case in recent years - bond prices have often fallen in tandem with stocks.

And Wilson thinks gold is now a more resilient hedge at a time “when investors are demanding higher yields for long-term bonds”.

"Gold is now the anti-fragile asset to own, rather than Treasuries. High-quality equities and gold are the best hedges", Wilson said.

Equities offer growth-driven upside, while gold performs as a safe-haven, he added.

So, what’s going on?

In recent years, since the Federal Reserve stopped hiking interest rates in July 2023, TLT (long-term Treasury bond ETF) has fallen by 12%.

Source: TradingView

Meanwhile, the price of gold has soared by more than 100% over the same timeframe.

Source: TradingView

So why is this happening?

Here are some potential reasons:

Inflation is “sticky” at best, and hasn’t been at or below the Fed’s target of 2% for years (it isn’t going back there any time soon) - this is bad news for bonds, which offer a fixed annual rate of return, and good news for gold, a widely recognized inflation hedge.
The US Government already has a giant debt pile of more than $37 trillion - and that figure is growing rapidly, with the Government running a “crisis level” fiscal deficit (and there’s no crisis) - so there’s a lot more supply of bonds coming down the road.
The US Government is continuing to attack the Federal Reserve and could be attempting to gain more control over monetary policy decisions. This is an extension of what some people have described as a “fiscal dominance regime”, where the Government runs big deficits, piles up debt, and then pressures the central bank to help finance that debt.
There is currently massive demand for gold from global central banks. In recent years many central banks have pivoted their reserves away from sovereign bonds and towards gold.

“The Treasury bond is a melting ice cube”

Mike Wilson’s thoughts are echoed by a growing number of other prominent voices.

This includes Darius Dale, of investment research firm 42 Macro, who in recent years has dropped bonds entirely, in favor of gold, in his portfolio recommendation.

Dale said:

“The traditional ballast of defense in a portfolio in this 60/40 world - the Treasury bond - is no longer the defensive asset.

“We are exiting that 60/40 world.

“From an institutional risk management perspective, its correlation to stocks is no longer favorable, from the perspective of playing defense.

“That means you have to find another way to play defense.

“We are in an era of persistent monetary debasement and financial repression.

“We have about $43 trillion of retirement assets in this country - and that whole industry is built upon figuring out how to get the retail investor to hold the bag.

“And right now, the biggest bag out there is the Treasury bond market - it’s a melting ice cube of an asset class.

“It is a risky asset in a fiscal dominance regime.”

What does all of this mean, in simple terms?

Traditional bonds are losing ground, and prominent voices are now starting to advocate for dropping bonds for gold.

This evolving approach could spark a shift in how portfolios balance growth and safety, setting the stage for a fresh take on long-held asset allocation views.

As the US grapples with sticky inflation, uncertainty surrounding the Federal Reserve and ballooning debt levels, investors may start redefining what a “safe asset” is.

The rising focus on gold in mainstream strategies could signal a potential long-term reset.

There’s no denying that gold has been a far superior asset to bonds over recent years.

But the crucial element for portfolio construction is that gold also shares some aspects of the “risk-off” nature of bonds.

It has often performed well during times of uncertainty and turbulence, like during the tariff saga earlier this year.

This means it may be able to do a similar job to bonds in a portfolio - acting as a balance against the risk of falling stock prices.

And if investors start shifting large amounts of money away from bonds and into gold, the next question becomes - who’s stepping up to buy the ever-increasing supply of Government bonds?