Gold and Silver Performance in 2022 vs. Other Asset Classes

2022 was one of the more eventful years on record for the financial markets. This was driven by a number of different factors, including, but not limited to multi-decade high inflation rates, tight Federal Reserve monetary policies, rising interest rates, rising mortgage rates, record high annual deficits, a national debt approaching $32 trillion, widespread shortages, supply chain issues, high fuel costs, and war, just to name a few. 

These factors, among others, affected various asset classes and sectors of the market differently. What we saw is that diversification still works in some respects although it may be less effective than it’s been in the past. Also, the stalwart financial investments that we’ve grown accustomed to were among the weaker performers and the traditional stock to bond ratio that many financial advisers advocate failed to provide the diversification and stability that you would hope for in a diversified portfolio.

While we realize that one year doesn’t constitute a trend and that past performance isn’t a guarantee of future returns, we thought it would be an interesting exercise to review the performance of gold and silver in isolation and as compared to other asset classes to see how they held up. This may give us some insight as to where the market is headed in 2023 as the financial climate continues to shift.

Gold Returns

At a positive return of .44%, gold wasn’t the top performer in 2022, but it also wasn’t the worst. In fact, it was one of the only asset classes to post a positive return and fared quite well versus some other investment options that we’ll discuss shortly.

Gold had one of its more volatile years in large part due to the Russian-Ukraine conflict that broke out in February of 2022. In response, the price of gold skyrocketed to a high of $2,075 in March of 2022. The price of gold retraced shortly thereafter once it was apparent that we weren’t going to join the conflict (at least not directly), thereby reducing the chances of World War III and nuclear intervention.

What makes a positive return for gold during 2022 impressive is that it was done in the face of multiple headwinds.

The primary headwind encountering gold was a tighter or restrictive monetary policy by the Federal Reserve. This was accomplished by the Federal Reserve selling bonds and increasing interest rates, which in turn caused the dollar to strengthen in the foreign exchange market. Historically, gold (and silver) has had a negative correlation to the strength of the dollar, so it’s encouraging to see the price of gold performance relatively well under these conditions.

While the purpose of this article isn’t to discuss 2023 returns, it should be noted that at the time of this writing, the price of gold has been one of the strongest performing asset classes in 2023 and may be benefitting from tailwinds as we continue to see a weakening economy and the need for the Federal Reserve to reverse course by taking a more accommodative monetary policy.

Silver Returns

You can’t discuss gold without silver, as these are the two most popular investment metals in the market. Surprisingly, silver squeaked out an even larger return in 2022, finishing the year in positive territory with a return of 3.52%.

Why would a stronger performance in silver be a surprise? The reason being is that silver is more volatile and tends to have larger price swings than gold. With a tight monetary policy and a strong dollar for most of the year, you would expect for the returns of silver to be weaker. While it never experienced the same type of spike as gold did following Russia’s invasion of Ukraine, it did see a bit of volatility throughout the year with a high of $26.90 and a low of $17.83, ultimately closing the year at $23.96. Much like gold, silver is off to a fast start in 2023, which should bode well for this popular white metal throughout the year as it benefits from a less hawkish Federal Reserve and overall weakness in the economy.

One more quick note regarding silver is that it tends to benefit from a “slingshot” effect. In other words, when the price of gold increases, silver tends to increase at a much higher clip, so if we’re entering into a precious metals bull market, or are already in the infancy stage of one, we should see silver perform especially well in 2023 and beyond.

Stock Market

Our customers and regular readers of our blog may have anticipated some of the challenges we experienced this past year and taken a more defensive position in precious metals and cash. However, the general public tends to take a more traditional approach to investing and likely has or had the lion’s share of their assets and investment holdings in stocks.

Unfortunately, 2022 was a difficult year for these folks, as the S&P 500 finished the year down 19.44% (on the cusp of bear market territory) and the Nasdaq 100 was off a substantial 33% (firmly in bear market territory).  For those individuals that aren’t familiar with these indexes, the S&P 500 is a proxy for the market as a whole while the Nasdaq is more tech-focused index. Of course, some individuals experienced even more substantial losses especially if they were invested in some of the stocks listed in Wolf Streets, Imploded Stocks report.

While the stock market is seeing a slight resurgence thus far in 2023, this is primarily driven by the weaker than expected December jobs report and a slight reduction in the inflation rate for December. What’s especially concerning with the stock market is that companies are reporting disappointing sales, lower profits, are announcing mass layoffs and are continuing to experience supply chain issues and higher than anticipated production costs.

This, coupled with above average valuations (currently at 20 relative to a historical average of 15), may pose some challenges, especially if we continue to see deteriorating fundamentals throughout the year.

Bond Market

To say that 2022 was an off year for the bond market is quite an understatement. In fact, by all accounts, it was the worst year on record. An overall return for the bond market is a bit difficult to pinpoint, as many different types of bonds, risk levels, and durations exist. Rather than identifying specific sectors, we’re going to report the returns of the Vanguard Total Bond Index Fund, which is a proxy for the bond market as a whole. This fund returned an abysmal -13.7% return, which is actually much better than many higher-risk bond classes. For comparison purposes, the 10 year bond posted negative returns of 16% for the year.

Bonds perform a bit differently than other asset classes in that the price and yield move inversely. In other words, when the price increases, bonds yield less (pay a lower interest rate) and when the price decreases, bonds yield more (pay a higher interest rate). This makes sense, as investors need to be compensated for the level of risk they’re assuming. If they deem bonds to be a riskier investment, then they should be paid a higher interest rate to assume that risk. Think of junk bonds. These are typically the highest-yielding bonds because they carry the highest level of risk.

At this writing, 5, 10, and 30 year government bonds are all yielding approximately 3.5%, which is 3% below the current inflation rate. While there’s some thought that inflation will continue to cool during 2023, investors will eventually need to be compensated for their investment. In other words, receive a real inflation-adjusted return. For this to occur, bond yields will need to increase, which will cause prices to decrease. In other words, current holders of bonds will see the value of their investments depreciate. Historically, bonds have been a poor performer in a high inflationary environment, so don’t look for this sector to see a big turnaround in 2023.

Cryptocurrency Market

Cryptocurrencies had an especially difficult year in 2022. The 800 pound gorilla is Bitcoin, which saw a negative return of 65%, but many of the smaller coins and tokens posted losses in the 80% – 95% range. Experts called it a “crypto winter.” A number of factors contributed to the decline, including the shift in the Fed’s monetary policy during the year, the collapse of some popular coins, tokens and exchanges, and most recently, the FTX bankruptcy debacle starring Sam Bank-Friedman (SBF), which will likely take years to sort out.

It’s not uncommon for the cryptocurrency market to experience wild volatility. In fact, there have been 16 corrections of 30% or greater since January of 2012 with the largest coming in at 83.6% from December 2017 to December 2018.  However, what makes this most recent correction significant is the number of large exchanges that prevented investor withdrawals and eventually went bankrupt. For some folks, this was their life’s savings.

Of course, a huge correction in the market also provides investors with opportunities. Those that were able to purchase coins and tokens at all-time lows will likely do well on their investments in the future. The important thing to remember is that exchanges (even the largest ones) are potentially risky, which is why there appears to be an increase in wallets and ledgers. A word of warning – the fallout from FTX may not be complete, so be careful as you wade into this highly volatile market class.

Real Estate Market

While it’s impossible to provide returns on such as broad market class as real estate, we wanted to provide some general comments and trends that we’re seeing in the market. The real estate market was one of the greatest beneficiaries of cheap money produced by the Federal Reserve beginning in 2020 as they attempted to offset the devastating effects of Covid by lowering interest rates and selling bonds.

The massive amount of liquidity produced by the Fed along with record low mortgage rates created a speculative boom in the real estate sector. In many cases, prices doubled, if not more, over a relatively short period of time. However, with the Fed tightening their monetary policy this past year, resulting in less liquidity and higher mortgage rates, we’re starting to see weakness in the real estate sector in general and the residential market, in particular.

This is evidenced in part by a 35% year over year plunge in home sales as of November 2022. Higher interest rates have put higher value homes out of reach for most Americans, as most home buyers choose a house not based on its value, but on their ability to make the monthly mortgage payments. If monthly payments have increased two to three times since the low (due to mortgage rates nearly tripling) there will be fewer buyers, which will put downward pressure on prices.

This appears to only be the beginning of the popping of the real estate market. With mortgage rates remaining stubbornly high, companies putting a freeze on new hires, and in the case of many tech firms, announcing layoffs of thousands of employees, we expect for 2023 to be the start of a multi-year decline in real estate prices.

Cash

We’ll wrap up our discussion of asset classes with cash or cash equivalent investments. If you have a checking account, your bank probably isn’t offering an interest rate on your balance. Even if you have a savings account, you’ll be lucky if your account is yielding much more than a .10% rate. To be able to get anywhere close to a 1% return on your cash holdings during 2022, you needed to seek out a certificate of deposit (CD). CD’s require you to commit your funds for one year, or longer. During 2022, CD’s offered yields as low as .14% upwards of 1.38% at the peak.

Of course, if you needed your funds anytime during the year and cashed out your investment, you were penalized and likely didn’t receive a return on your investment.

As we begin 2023, the average return on one year CDs has increased to 1.41%. This means that at the current inflation rate of 6.5%, you’re guaranteed to lose 5% for the year. This is of course devastating to folks who are retired or are on a fixed income. In many cases, they’re forced to take on unnecessary risk in search of yield in hopes of keeping up with inflation.

Do you remember when you could invest in a CD for a real rate of return? Yeah, us too! Hopefully, we’ll get back to that point at some point in the future, but needless to say, that’s not going to happen anytime soon.

Summary

In conclusion, spent some time analyzing the financial markets and the economic landscape in 2022. Of course, there wasn’t much positive news to report. In most cases, you did well to limit your losses. We began our discussion with gold and silver. While on the surface, these metals had an uneventful year, the important thing to remember is that they still managed to produce positive returns amongst a number of headwinds. We believe those headwinds will shift to tailwinds in 2023 and expect these to be among the top performing asset classes this year.

The stock market also had a rough year. All indexes are in correction or bear market territory. Unfortunately, this only seems to be the beginning, as weak earnings reports, poor earnings guidance, hiring freezes, and in some cases, large, anticipated layoffs will likely contribute to another tough year for a market that began the year already highly valued.

Cryptocurrencies had the most challenging year among the asset classes that we discussed. They say that the best time to invest is when “there’s blood in the streets.” In many cases, there’s complete carnage, but the fallout from FTX isn’t likely complete, so tread lightly and keep your coins off the exchanges in cold storage.

Real estate is only beginning to see the fallout from artificially suppressed interest rates and cheap money. This is a sector that is wildly overvalued and will likely see the first of a couple tough years ahead now that the bubble is beginning to pop.

Cash turned out to be one of the best plays in 2022, but it’s not a long-term solution. With a current negative real return of 5% in a cash equivalent investment, it will take a little over 14 years for you to lose half your spending power.

If you’re convinced, like we are, that gold and silver appear to be the most attractive investments in 2023 and beyond, we welcome you to contact the coin and bullion experts at Atlanta Gold & Coin.

We can assist no matter your level of expertise and will make sure that your investments are consistent with your long-term goals. We’re not paid on commission, so our goals are aligned with that of our customers. Call us today at 404-236-9744 to see why we’re Atlanta’s leading coin dealer.

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