Which Alternative?

The classic 60/40 portfolio which has become a staple for investing over the last 50 years is getting some pushback. The bond market has been in a bull market since the early 1980s, and maybe we are at the end of an era, that is interest rates will indeed be "higher for longer".

My thought is that there are limits as to how high interest rates can really go, because there is just too much debt out there. So either we accept the consequences of mass defaults or at some point yield curve controls come into play. (My guess is the latter of the two)

So bonds, imo, become range bound providing some yield and volatility control for the portfolio. However, the days of making a meaningful contribution to total return are likely gone. People are looking at "alternatives" to fill the diversification and opportunity void.

Alternatives come in all kinds of ice cream flavors, each having their pros and cons. To me, I continue to see precious metals as a attractive opportunity, but it is a complicated alternative to say the least.

Gold tends to be the most talked about, so I'll stay there. It often appreciates as real yields and the US dollar falls. But what makes gold complicated is that in can "disconnect" from normal relationships. And we see that now as gold is holding up rather well in the face of rising real rates and a stronger USD. (note real yield inverted in chart)

The resilience could be rather bullish over the next 12 months. I think real yields are likely to come down as the Fed will be forced to pivot in the coming recession. The USD will probably strengthen though as a safe haven. But given the elevated tail risk for a deeper recession (imo), gold could disconnect further from that relationship and benefit from the "fear" trade. Further, Chinese investors are paying a premium now for gold, possibly as an alternative to real estate.

Again, precious metals are a complicated asset class that have many influences. They also provide some powerful moves when their narrative becomes popular. Something to watch in 2024.