Rising inflation expectations have attracted an unlikely investor to gold.
Richard Bernstein, who has spent more than 35 years on Wall Street, is buying gold for his clients' portfolios for the first time.
"My firm and I are not gold bugs," said Bernstein, a former chief investment strategist for Merrill Lynch who started his eponymous firm in 2009, at the Morningstar ETF conference on Thursday. "Most of the people who tell you stories about gold are people trying to sell you gold funds and gold ETFs, and those stories are not based on reality at all."
When Bernstein used to teach at New York University's Stern School of Business, he would ask his students what the difference was between gold and wampum, the shell beads American Indians used to trade.
"The correct answer was, 'There is no difference,'" he said. "It's a real asset that we ascribe some romantic value to, that kind of becomes a pseudo-currency."
But when Bernstein quizzed conference attendees on the right time to buy real assets, like metals, he revealed the reasoning behind a gold buy for a guy who thinks it's 'wampum.'
The answer: "You buy real assets when inflation expectations are starting to go up," he said.
Recent statements from the Federal Reserve indicate a greater willingness to tolerate rising inflation expectations, Bernstein said.
"For a long time, gold was really not a diversifier," Bernstein said. When gold prices hit new highs earlier this decade, gold had a positive correlation to stocks, meaning when stocks rose, so did gold prices.
Gold has become slightly negatively correlated to the stock market, Bernstein said, and so gold adds extra ballast in a portfolio to hedge against volatility. "It's a change in the way we look at the world," Bernstein said.
Gold prices have surged this year. The world's largest gold-backed exchange-traded fund, SPDR Gold Shares (GLD), has risen 25.75 percent so far in 2016. On Friday gold dipped as a typically dovish Federal Reserve voting member gave comments that the market interpreted as signaling a willingness to hike rates sooner than the market has been expecting.
Correction: Richard Bernstein is a former chief investment strategist for Merrill Lynch. An earlier version of this article misstated Bernstein's previous employer.