Gold is a symbol of wealth and status that's lasted for
centuries, associated with all things luxurious from jewelry to
sports cars to even high end dining. It's one of the most
beloved and influential commodities that exists in our
market today.
Gold is unique in that it's both a commodity and a currency. So
some investors will hold it purely as a financial asset and
others may hold it in jewelry form so it can be enjoyed. But
also it's a way of storing wealth as well.
It's a really fascinating asset. It's been around for a long
time, which just shows the power of what it's been and how it's
played into the market. With an average
daily trading volume of $183 billion, gold is one of the
largest financial assets in the world. Its value has seen
explosive growth in recent years. At the start of 2000,
gold was priced at just $460, when adjusted for inflation. By
August 2021. That number had ballooned to roughly $1,815 per
So you can see that the dollar value of holding gold has risen
over the past decade. But
not all investors are in love with gold. Warren Buffett has
spoken out numerous times on his doubts, calling it an asset with
no utility. You know,
one of the key characteristics of gold is it has no income
attached to it. It pays no income, it doesn't pay a
dividend like stocks do and it doesn't have a coupon like bonds
do, but I think that's going to become more of an issue going
forward.
So how valuable is gold as an investment? Gold is an enticing
asset for investors. It's been around long enough to feel
reliable, durable enough to be stored long-term, and scarce
enough to be considered precious. Compared to other
precious metals. It has a wider variety of real world
applications that provide a constant demand for the metal.
It's extremely malleable and it's easy to work. If we look at
the breakdown of demand, most of gold's demand is consumed by the
jewelry sector. And then we tend to have a much more volatile
piece maybe up to a third or 40% that's consumed by the
investment sector. But when we look at the technology component
that's much smaller, it's normally around 10% and a little
bit smaller.
Central banks and financial institutions also play an
important role in the demand for gold. In 2021, central banks
eld more than 35,000 metric ons of gold, about a fifth of
ll the gold that's ever been ined. The International
onetary Fund holds about 2,814 metric tons of gold valued at
It's partly historical. I mean until the 1970s, large portions
of the world including the US were on the gold standard, where
they basically fixed the value of their currencies relative to
gold. And that basically meant that, you know, a very large
portion of central bank reserves had to be held in gold.
So we've seen over the past couple of years, central bank
buying has picked up and in fact, in 2018, we saw buying in
excess of 650 tonnes. So the appetite to buy gold continues
to persist. Yes, we've had periods where we saw central
banks reducing their gold holdings. But broadly, we've now
seen central bank holdings reach their highest levels since 1999.
Many investors use gold as an asset to diversify risk due to
the fact that the metal is known to hold its value over time. We
see that if we look at the inflation adjusted value of
gold, looking at the real price of gold today, we can see that
it's pretty close to the levels that it hit back in 2011, but
also the highest that it hit back in 1980. So when we adjust
the price, whether we're looking at the GDP deflator, or whether
we're using U.S. CPI, we can s e that gold has pretty much he
d its value through decades
Throughout history, gold has been most popular for its
ability to hedge against any sort of market volatility. Take
the great inflation of the 1970s, for example. Between 1970
and 1979, the US suffered from one of the worst inflation rates
in recent history. Within this period from 1973 to '79, gold
showed an impressive return of 35%, an enormous gain compared
to any other commodity,
The dollar and gold had an inverse relationship. So as the
value of the dollar, you know, US currency is debased, pulls
back, often times gold moves in the other direction so it moves
positively. You know, in situations like that, because
it's not as susceptible to inflation, it doesn't lose its
value like other assets do and that's generally from a macro
perspective why investors invest
in gold. The same goes for deflation as well. Gold tends to
be the most sought out commodity during times of economic or
financial crisis. Between 2008 and 2012, following the Great
Recession, the value of gold increased dramatically from
about $1,150 per ounce to around $1,970 per ounce, adjusted for
inflation. Gold prices also reached new heights during the
2020 recession caused by the pandemic, with prices reaching
an all time high of $2,021 per ounce overnight, settling above
$2,000 for the first time in August 2021.
If you look back at the last five big market correction, so,
you know, tech bubble, global financial crisis, you know, all
the way through to the COVID crash of last year, you know,
your average s&p 500 was down about 28% on average, gold was
up about 11% on average.
It's because gold has proven its value in being a liquid asset,
an asset that can be used to meet margin calls elsewhere and
then still be able to retain its value.
But whether gold is great for hedging is widely debated among
experts.
It's widely discussed and argued whether gold is a greatest
inflationary hedge. And I would argue it's probably not I think
equities are, but I do think it plays a role.
More recent analysis has shown that gold's correlation to
inflation has been relatively low. In general, it's yielded
mixed returns for investors during high inflationary
periods, suggesting that using gold to hedge might be more of a
gamble than a safe bet.
Gold can be good for hedging, it depends on the type of risks
that you're trying to hedge. So if it's systemic risk, then gold
can be an effective hedge. If it's something that's much more
unique to say, one particular country, or it's a risk that
isn't system wide, then it's not particularly effective hedge. So
we have had periods over the past five years, where gold safe
haven role has been questioned and whether it still has a role
in a portfolio. While gold
might have won big between 1973 and 1979, gold investors lost
10% on average from 1980 to 1984, when the annual inflation
rate was at 6.5%, and another 7.6%, from 1988 to 1991 when
inflation sat around 4.6%.
Gold is not necessarily a perfect hedge against inflation,
but it can be a strategic hedge against inflation. So if gold is
held for a period of time before inflation picks up so various
studies have shown us that if gold is held for 12 to 18 months
before inflation takes higher, and then it's held for an
additional 12 to 18 months while inflation moves higher, it can
be a good inflation hedge. But if it's just bought for a short
period, let's say a month, it may not prove to be an effective
inflation hedge. As
a long term commodity, gold also come short in terms of returns
compared to stocks and bonds. Since 2011, the s&p 500 showed
an annualized return of 14.55%. The annualized return for a
10-year Treasury note set at just 2.57% for the same period.
In comparison, Gold's 100year annualized return was below zero
at -0.05%.
My concern with gold and commodities like this is more
about the long-term yield. You know, so you have these macro
events, these exogenous events like we just dealt with last
year with COVID and geopolitical issues. I think generally as we
move into a different cycle, gold is not as great a performer
as we move into a normalized environment.
Warren Buffett is perhaps the most well-renowned figure for
his dislike of gold. He has considered gold to be an
unproductive asset that pays no dividends or interests. In
August 2020, Buffett made headlines after purchasing $562
million worth of shares in a gold mining company. One year
later, Berkshire Hathaway's 13F filing later revealed that he
had exited the gold position altogether by the end of 2020,
reaffirming his investment philosophy on gold.
It's prudent portfolio management to have maybe a small
allocation. But this is not an asset that you want to be
heavily entrenched into if you're looking for long-term
yield. So I would agree with Warren 100% from an investor
perspective,
Other commodities like cryptocurrency and even silver
have also gained immense popularity in recent years,
challenging gold status in today's economy. However,
whether it'll actually succeed in toppling gold is a different
story.
If you're perhaps looking for exposure to a commodity, that
gives you some of the macro exposure, but also a greater
commodity exposure when it comes to industrial usages, investors
may prefer silver. But if you're looking for a commodity, or
investment that is more exposed to the macro environment, then
investors tend to turn to gold instead.
I think now there's a lot of conversation about, you know,
digital asset being deemed as stored value whereas gold has
always been deemed as store value. I think that will chang
and evolve over time. So to b honest with you, I do not see i
as competition in the long run I think both asset classes ca
play in this market and that' what makes them market. So it'
very kind of exciting to see ho they both develop alongside eac
other
If history has proven anything, the influence that gold has over
the world isn't going away anytime soon
I think you need to be just aw re that these bull markets do
't last forever. And the longer they go on, the more you just n
ed to, I think be looking at the e again, these sort of rainy
ay assets, you know, like gold, think you always want to be hol
ing them. The question is just s rt of how much.
Certainly compared to the prices that we've seen over the past
five to 10 years, we think gol prices will remain ele
ated. And then we might therea ter, we might see another move h
gher in gold prices, but we thin in the near term there's more
upside risk, and then towards the end of next year, we are
likely to see gold prices s arting to trend lower.