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 ounce. 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 around $158.5 billion. 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 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 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.
