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 in 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 dollars
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 dollars when
adjusted for inflation by august 2021
that number had ballooned to roughly one
thousand eight hundred fifteen dollars
per ounce so we 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 is gold is it has no
income attached to it it pays no income
it doesn't pay a dividend like stocks do
uh 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
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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
it's easy to work if we look at the
breakdown of demand most of gold demand
is consumed by the jewellery sector and
then we tend to have a much more
volatile piece maybe up to a third up to
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 held more than 35 000 metric tons
of gold about a fifth of all the gold
that's ever been mined
the international monetary fund holds
about 2814 metric tons of gold valued at
around 158.5 billion dollars so partly
it's historical i mean until the sort of
1970s i mean you know 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 and
central bank buying has picked up and in
fact in 2018 we saw buying in excess of
650 tons 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 can 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
highs that it hit back in 1980 so when
we adjust the price i mean look at
whether we're looking at the gdp
deflator or whether we're using uscpi we
can see that gold has pretty much held
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
percent an enormous gain compared to any
other commodity the dollar and gold have
an inverse relationship so as the value
of the dollar you know u.s currency is
the base it pulls back
oftentimes
gold
uh 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
uh 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 one
thousand one hundred fifty dollars per
ounce to around one thousand nine
hundred seventy dollars 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 two thousand twenty one
dollars per ounce overnight settling
above two thousand dollars for the first
time in august 2021. you know if you
look back at the last five big market
corrections so you know tech bubble
global financial crisis you know all the
way through to so the covet 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 is
improving its value in being a liquid
asset an asset that could 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 risk 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's 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 percent and another seven
point six percent from 1988 to 1991 when
inflation sat around 4.6 percent 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 ticks
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 comes 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 sat at just 2.57 for the
same period
in comparison gold's 10-year annualized
return was below zero at negative 0.05
percent 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
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 dollars
worth of shares in a gold mining company
one year later berkshire hathaway's 13 f
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 uh to
have maybe a small allocation there
but this is not an asset that you want
to be heavily entrenched in to if you're
looking for long-term yield so i would
agree with warren 100
you know 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 weather will 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 make their
silver
but if you're looking for a 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 a digital asset
being deemed as store value whereas gold
has always been deemed as stored value i
think that will change and evolve over
time so to be honest with you i do not
see it as competition in the long run i
think both asset classes can play in
this market and that's what makes a
market so it's very kind of exciting to
see how they both develop alongside each
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 just aware that
these bull markets don't last forever
and and the longer they go on the more
you just need to i think be looking at
these again these sort of rainy day
assets you know like gold i i think you
always want to be holding them the
question is just sort of how much so
certainly compared to the prices that
we've seen over the past five to ten
years and we think gold prices will
remain elevated and there we might up
thereafter we might see another move
higher in gold prices but we think in
the near term there's more upside risk
and then towards the end of next year
we're likely to see gold prices starting
to trend lower
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