Gold: Is It Time to Reassess Its Role in Your Portfolio?
Is it me, or do Gold Bugs get a lot of hate? Gold Bugs are also investors, and all their crime is, is being bullish on gold and promoting it as an investment. They seem to be unfairly judged for their belief and enthusiasm for their perspective on the merits of gold as an investment. Different perspectives, about the prospects of other financial assets, seem to enjoy a lot more tolerance and forgiveness despite their having similar high conviction “evangelists”, punting their thesis as to why stocks/bonds/property are a great investment. It feels to me that somehow Gold Bugs got put into the “annoying corner” commentary box, while other market participants are tolerated, even when talking up non-profitable, zombie companies, as an investment case. Is it about the Gold Bugs, or is it about gold?
Gold, wins the award for not only having piqued investor interest as an asset, but it has also piqued investor’s by its performance as an asset. Of all the theories I hear about when gold is the best asset to buy, and why, my experience is gold prices do their own thing more often than not. This, contrary to the view of the smart people, clad with tailor-made suits and ties, appearing as guests on CNBC. Maybe I am being unfair. The truth is, nobody has a crystal ball that works accurately in predicting the future performance of the markets. Smart people that work on Wall Street are “forced” into helping to come up with headline making stories.
The Global Financial Crisis led to the Great Recession, arguably the most severe recession experienced worldwide since The Great Depression (1929-1939). One of the arguments for gold as an investment, is the store of value aspect of it. With the S&P 500 having experienced a peak to trough fall of over 57% from October 2007 to March 2009, Gold Futures prices in the same period went up, from a trough to peak of 33%. Gold continued to outperform the S&P 500 even after the Great Recession, going from the low of $726 in October 2007, and peaking at the high of $1,923 in September 2011 (a move of over 164%).
The narrative of gold as an asset and store of value was following the price of gold. Unlike fiat currency, where central banks were printing more money, and making it worth less, gold was “limited” was one argument. I say limited in inverted commas as there are always gold reserves underground which become more worth mining if the price is high enough. By implication, mining more adds to the available physical gold above the ground. The peak of the Gold Futures price in 2011, became a distant memory as the gold price began to fall from September 2011 to December 2015 (and by implication underperforming the S&P 500). The Fed Funds Rate did not change and the accommodative monetary policy remained, so I can only imagine the frustration with the gold price coming off of its highs.
This was not to be peak accommodative monetary policy, but it was more than we had ever seen before. By accommodative monetary policy I mean when central banks keep interest rates low (which makes for lower Fixed Income returns from owning Bonds) and increase money supply. This is the central bank’s approach to stimulate the economy. Even as gold prices began again to steadily rise in 2016, prices got nowhere near the levels of September 2011. Fast forward to March 2020, and how Central Banks and governments responded to COVID-19. With the ensuing chaos from government shut downs and central banks dropping interest rates to near zero, the Gold Futures price got as high as $2,089 in August 2020.
The action of governments and central banks was not only a tailwind for Gold Bugs in that they saw money printing as making the dollar worth less and gold a better alternative, it was also a risk to inflation, which ironically The Fed wanted. Yes, you read that right, The Fed for many years before 2021, had wanted inflation and they believed they had the tools to control it! That brings me to the second argument when people will encourage you towards gold as an investment.
Gold is often positioned as an inflation hedge. One of the reasons gold became very topical at the start of 2022 was inflation was clearly on the rise. Even The Fed had hit the stage where they were seeing inflation as a threat to the economy, retiring the use of the words “inflation is transitory”. Inflation did not start looking like a problem in 2022, it raised its ugly head in 2021, yet the Gold Futures price was down for the full year of 2021. Inflation continued to rise every month until the peak in June 2022, when year on year inflation was at 9.10% (levels last seen for inflation in the USA in 1981). Gold Futures prices closed the month of July 2022 at $1,781.8 which was lower than the peak price of August 2020 and lower than the peak price of September 2011. In essence, when inflation was at the worst levels the U.S had seen in more than 40 years, gold prices were lower than they were 10 years earlier! That was bewildering, and frustrating for Wall Street Strategists and Investors, considering this was the moment for gold to shine. Gold Bugs are not fair-weather friends, they hung in there with their perspective on gold as the investment.
“Gold is just not working”, became more and more the narrative on Wall Street, and in 2023 that narrative has not changed. When I hear advisors mention gold and their clients tell them to skip that part of the presentation as they are not interested, I have to wonder if this is finally the moment for Gold Bugs to have their day in the sun again. For the fickle, Gold Futures prices made a new high in August 2020, when the world was at peak fear and accommodative monetary policy. The only time that price got close to that level again was in March 2022. This in spite of the rest of the commodities going higher, inflation making multi decade record high and, a shooting war in Europe as Russia invaded the Ukraine!
Yet here we are… We are not only back to the scene of the crime (the August 2020 price peak). Gold Futures have closed at a record monthly high for the month of November, a record weekly high for the week just ended on December 1 2023 and also made a record intra day high price of $2,095.70. Given gold’s tendency to do what it’s not expected to do, what are the odds on it continuing to rise, while stocks are rising, inflation is no longer a risk, geo-political tensions are not escalating and real yields are relatively higher than they have been over the past couple of decades?
Maybe it is because Gold Bugs can go too far about why they see gold as a more stable and reliable store of value than stocks or bonds. If they are not scaring us with how fiat currencies are not backed by a physical commodity, they are scaring us with sweeping statements about the fragility of the financial system. Maybe it is because the price of gold is so volatile in the sense of not following consistent relationships of theory? Gold for me is in the long run is a sound constituent of an investment portfolio, seeing as I believe that Stocks, Commodities and Bonds make for a diversified portfolio. The Gold Bugs and the frustrated pundits are not my problem.