Gold has always been a sign of wealth and rank, connected with everything luxurious from jewellery to sports buses and even high-end dining. It’s one of the most valuable and significant commodities available at the moment. Gold is unique in that it serves as both a commodity and a medium of exchange. As a result, some investors will hold it solely as a financial asset, while others will hold it as jewellery to enjoy. But it’s also a means of storing riches. It’s a fascinating piece of equipment. It’s been around for a long time, which just goes to show how powerful it is and how it has influenced the request.
Its value has skyrocketed in recent years. When the year 2000 began, gold was priced at $ 460 per ounce, when adjusted for inflation. By July 2021. That figure had skyrocketed to around $1800 per ounce. As you can see, the dollar value of owning gold has risen over the last decade. However, not every investor is enamoured with gold. Warren Buffett has spoken out numerous times about his doubts, describing them as an asset with no mileage.
You know, one of the most important aspects of gold is that it has no monetary value.
It doesn’t pay any income, it doesn’t pay a tip like stocks do, and it doesn’t have a pasteboard like bonds do, but I suppose that will become more of an issue in the future. So, how valuable is gold as an investment? For investors, gold is an enticing asset. It’s been around long enough to feel dependable, durable enough to be stored for an extended period of time, and scarce enough to be considered valuable. When compared to other valuable essences. It has a broader range of real-world operations, resulting in constant demand for the essence. It’s extremely malleable and simple to work with. However, when we look at the breakdown of demand, we can see that the jewellery sector consumes the majority of gold demand.
In addition, we have a much more volatile piece, perhaps a third or forty percent, that is consumed by the investment sector. However, when we look at the technology element, it is normally around 10 and a little bit lower. Central banks and financial institutions also play a significant role in gold demand. Central banks held more than metric tonnes of gold in 2021, accounting for roughly one-fifth of all gold ever mined. The International Monetary Fund owns approximately metric tonnes of gold worth approximately $158.5 billion. It’s not entirely literal. I mean, until the 1970s, large parts of the world, including the United States, were on the gold standard, which essentially fixed the value of the currency.
It’s not entirely literal. I mean, until the 1970s, much of the world, including the United States, was on the gold standard, which essentially fixed the value of their currencies relative to gold.
And that primarily meant that a sizable portion of central bank reserves had to be held in gold. So, as we’ve seen in recent months, central bank buying has increased, with purchases exceeding 650 tonnes in 2018. As a result, the desire to purchase gold remains strong.
Yes, there have been periods when central banks reduced their gold holdings. However, we have now witnessed central bank effects reach their highest levels since 1999.
Many investors use gold as an asset to diversify risk because gold is known to hold its value over time. We can see that if we look at the inflation-adjusted value of gold, looking at the real price of gold at the moment, we can see that it’s close to the levels that it reached in 2011, but also the highest that it reached in 1980. So, when we acclimate the price, whether we look at the GDP deflator or the US CPI, we can see that gold has enough had its value over decades. Throughout history, gold has been prized for its ability to hedge against any type of demand volatility.
Consider the great inflation of the 1970s. Between 1970 and 1979, the United States experienced one of the highest inflation rates in recent history. During this period, from 1973 to 1979, gold returned an impressive 35%, an enormous gain when compared to any other commodity. The dollar and gold were inversely related. As the value of the dollar, you know, the US currency, depreciates, gold often moves in the opposite direction, so it moves positively. You know, in situations like that, because gold is not as susceptible to inflation, it does not lose its value as other assets do, and that is generally why investors invest in gold from a macro perspective.
The same is true for deflation. During times of economic or financial crisis, gold is the most sought-after commodity. Following the Great Recession, the value of gold increased dramatically between 2008 and 2012, rising from around $1,150 per ounce to around $1,970 per ounce, adjusted for inflation. During the 2020 recession caused by the pandemic, gold prices reached an all-time high of $2,021 per ounce overnight, eventually settling above $2,000 for the first time in August 2021.
If you look back at the last five major market corrections, such as the tech bubble, the global financial crisis, and the COVID crash last year, you’ll notice that the S&P 500 was down about 28 percent on average, while gold was up about 11 percent on average.
It’s because gold has proven its worth as a liquid asset, one that can be used to meet margin calls elsewhere while still retaining its value. However, whether gold is a good hedge is widely debated among experts. It’s hotly debated whether gold is the best inflationary hedge.
And I would argue that it is probably not the case, as I believe equities are, but I do believe it plays a role. Recent research has revealed that gold’s correlation to inflation has been relatively low. In general, it has produced mixed returns for investors during periods of high inflation, implying that using gold to hedge may be more of a gamble than a safe bet. Gold can be useful for hedging, depending on the type of risk you’re attempting to hedge. So, if it’s a systemic risk, gold can be a good hedge. It’s not a particularly effective hedge if it’s something that’s much more unique to, say, one particular country, or if it’s a risk that isn’t system wide.
So, over the last five years, the role of gold as a safe haven has been called into question, as has its place in a portfolio. While gold may have won big between 1973 and 1979, gold investors lost 10% on average from 1980 to 1984, when annual inflation was at 6.5 percent, and another 7.6% from 1988 to 1991, when inflation was around 4.6 percent. Gold is not always a perfect hedge against inflation, but it can be a strategic hedge.
So if gold is held for a period of time before inflation picks up, as various studies have shown, and then it’s held for an additional 12 to 18 months while inflation moves higher, it can be a good inflation hedge.
However, if it is only purchased for a short period of time, say a month, it may not be an effective inflation hedge. Gold, as a long-term commodity, also falls short in terms of returns when compared to stocks and bonds. Since 2011, the S&P 500 has returned 14.55 percent on an annualised basis.
For the same time period, the annualised return on a 10-year Treasury note is set at just 2.57 percent. In comparison, gold’s 100-year annualised return was -0.05 percent. My main concern with gold and commodities like this is the long-term yield.
So you have these macro events, these exogenous events, such as COVID and geopolitical issues, which we just dealt with last year. In general, I believe that as we move into a new cycle, gold is not as good a performer as it once was. Warren Buffett is perhaps the most well-known person for his disdain for gold. He considered gold to be a waste of money because it pays no dividends or interest.
Buffett made headlines in August 2020 after investing $562 million in a gold mining company. One year later, Berkshire Hathaway’s 13F filing revealed that he had completely exited the gold position by the end of 2020, reaffirming his gold investment philosophy. Having a small allocation is prudent portfolio management. However, if you’re looking for long-term yield, you don’t want to be heavily invested in this asset. So, from the standpoint of an investor, I completely agree with Warren. Other commodities, such as cryptocurrency and even silver, have grown in popularity in recent years, challenging gold’s position in today’s economy.
However, whether it will actually succeed in dethroning gold is another saga. Investors may prefer silver if they are looking for exposure to a commodity that provides some macro exposure but also a greater commodity exposure when it comes to industrial usages. However, if you’re looking for a commodity or investment that is more exposed to the macro environment, gold is a popular choice. I believe there is now a lot of discussion about digital assets being regarded as store value, whereas gold has always been regarded as store value. That, I believe, will change and evolve over time.
So, to be honest, I don’t see it as competition in the long run. I believe both asset classes can play in this market, which is what distinguishes them. So it’ll be interesting to see how they both develop alongside each other. If history has taught us anything, it is that gold’s influence over the world isn’t going away anytime soon. However, you should be aware that bull markets don’t last forever. And the longer they go on, the more you just need to look at them again, these kind of rainy ay assets, you know, like gold, think you always want to be holding them.
The question is simply how much. Certainly, when compared to the prices we’ve seen in the last five to ten years, we believe gold prices will remain elevated. And then we may see another move higher in gold prices, but we believe there is more upside risk in the near term, and gold prices are likely to begin to trend lower by the end of next year.