Are government bonds currently preferable to gold?
News Arnulf Hinkel, Financial journalist – 25.10.2022
Gold and bonds of stable industrialised countries are considered safe components of the investor portfolio. While both asset classes perform similarly in calm market phases, gold develops a negative correlation to cyclically driven asset classes in times of crisis, which means that the precious metal tends to perform better in such phases - most recently during the coronavirus pandemic. 2022, however, is different: the extremely strong US dollar and many countries’ announced and implemented interest rate hikes are weighing on the gold price, while government bonds are becoming more attractive.
Gold performance in 2022 better than 10-year government bonds
After having performed well in the Eurozone so far this year, the gold price dropped in October and is currently only up 5 per cent year-to-date (as of 24 October 2022). However, this is above the interest rates in most EU countries: according to the German financial news portal börse.de, German 10-year government bonds currently offer an interest rate of 2.46 per cent, French bonds 3.02 per cent, Belgian 3.08 per cent, Austrian 3.15 per cent, and Dutch 2.78 per cent. The situation is very similar in Europe’s neighbours: in England, for example, gold has gained 7.5 per cent since the beginning of the year, while 10-year English government bonds currently yield only 4.0 per cent.
Different taxation also plays a role in the bonds/gold comparison
When comparing the performance of gold and government bonds, it should not be forgotten that, at least in Germany, interest income from bonds is subject to the final withholding tax of 25 per cent, while gains from gold - also from Xetra-Gold - are tax-free after a one-year holding period. Moreover, since the gold price usually only comes under temporary pressure from key interest rate increases, the precious metal also has its place in the 2022 portfolio. Both government bonds and gold are valuable portfolio components, especially when it comes to long-term investment strategies with a rather low risk tolerance.
