In the wake of reaching record highs, gold continues to captivate investors and economists alike. This precious metal, often viewed as a safe haven, has recently experienced unprecedented value. We explore the factors behind its compelling success below.
Gold has been used as a commodity of value and a medium of exchange for thousands of years, with its use dating back to ancient civilisations. The earliest records of gold being used in transactions are from around 600 B.C. In the modern era, while gold is no longer used as a standard for backing the value of paper currency (the Gold Standard was largely abandoned in the 20th century), it continues to be a significant asset in the reserves of central banks and a popular choice for individual investors as a hedge against inflation and economic uncertainty. Thus, gold’s role as a commodity of value and a store of wealth spans at least 2600 years, highlighting its enduring appeal and stability across different eras and societies.
As we navigate the complexities of modern financial markets, understanding the role of gold as an asset class becomes paramount. This article aims to give investors insights, enabling them to make informed decisions in their financial journey.
The Scale of the Gold Market:
While significant, the gold market is modest compared to the global equity market. The estimated value of all gold ever mined is about $13,72 trillion (World Gold Council, 2021). This figure pales compared to the global stock market capitalisation, which is around $94 trillion (World Federation of Exchanges, 2021). This disparity highlights gold’s unique position in the investment landscape.
Historical Perspective:
Gold’s performance during financial recessions underscores its role as a safe-haven asset. For example, gold prices increased significantly during the 2008 global financial crisis, providing a cushion against the stock market crash (World Gold Council, 2021). By March 2008 when the financial crisis claimed its first major victim, the gold price reached a new all-time record of $1,011 dollars an ounce, a rise of over 50% in just nine months.
Understanding Price Drivers – A variety of factors influences gold prices:
- Global Economic Trends: Investors often flock to gold during times of uncertainty because it is perceived as a stable store of value, unlike paper currencies or other assets that can be more directly impacted by economic policies or company-specific issues
- Inflationary Pressures: In times of high inflation, gold is sought after as a protective asset.
- Currency Movements: The strength of the US dollar, in particular, is inverse to gold prices.
- Supply and Demand: Demand for gold from various sectors, including jewellery and industrial uses, and by central banks and investors can drive up its value, especially during times of economic stress. Mining outputs, geopolitical tensions, and central bank policies significantly impact gold prices.
- Tangible Asset: Gold is a physical asset, unlike stocks or bonds. This tangibility offers a sense of security for some investors, especially during times when digital or paper assets seem more vulnerable to systemic risks.
Correlation Between Gold and Equity Markets:
Gold’s most compelling attribute is its low correlation with other asset classes, particularly stocks and bonds. This attribute becomes particularly salient during periods of market turmoil or inflationary pressures. Gold’s value often moves independently of the equity markets. This low-to-negative correlation means that when stock markets experience downturns, gold prices can hold steady or even increase. This characteristic makes gold an excellent tool for portfolio diversification and risk management.
The SPDR Gold Shares Trust has a correlation coefficient of 0,06 with the S&P 500 indicating little to no linear relationship with the S&P 500.
The Costs of Physical Gold Investment for Tangible Assets:
Investing in physical gold entails several direct costs:
- Storage and Security: Safekeeping in secure vaults or safety deposit boxes involves ongoing expenses.
- Insurance: Protecting the physical asset from theft or damage is crucial.
- Transaction Fees: Broker or dealer commissions for buying and selling gold add to the investment cost.
Gold is a highly liquid asset that can be easily bought and sold. In times of financial stress, this liquidity is particularly valuable as it can be quickly converted into cash; however, investors must consider the lack of liquidity for holding physical gold as the market for physical commodities is not as fluid as having gold through shares or ETFs. Finding a buyer for your physical gold may take time.
Exploring Gold ETFs:
Gold Exchange-Traded Funds (ETFs) represent a significant evolution in how investors can access the gold market. These funds, traded like stocks on the exchange, offer a direct link to the price movements of gold, allowing investors to partake in the gold market without the complexities of handling physical gold. This offers investors an efficient way to access the gold market without the intricacies of handling physical gold.
Spotlight on SPDR® Gold Shares (GLD) ETF:
Among the plethora of gold ETFs, SPDR® Gold Shares (GLD) stands out due to its size and popularity. This ETF strives to reflect the performance of gold bullion, lessening the Trust’s expenses. Its management fee is approximately 0.40% annually, making it a cost-effective option for gold investment (“SPDR Gold Shares (GLD).
Below is a table showing the annualised performance of this Trust up until 30 November 2023.
Considerations:
Unlike stocks or bonds, gold does not offer dividends or interest income. This lack of yield can hinder income-seeking investors, particularly in a low-inflation environment. Allocating a significant portion of a portfolio to gold can lead to missed opportunities. As gold typically underperforms in a bull market for equities, overexposure to gold can result in lower overall portfolio growth.
Conclusion:
In the diverse landscape of investment options, gold stands out for its timeless value and stability. With its distinct characteristics and historical significance, gold is an indispensable asset in a diversified investment portfolio. It offers a hedge against volatility and economic downturns, enhancing the stability and resilience of an investor’s portfolio. Understanding the multifaceted nature of gold investment is essential for aligning it with individual financial goals and prevailing market conditions.
