Gold’s performance at times of geopolitical volatility underscores its potential value as a portfolio diversifier. However, gold has also performed well amid strong equity markets this year as real interest rates fell. But just as there are many “goldbugs” who are enamored by the asset, there are many skeptics who raise legitimate questions about it. We investigate potential merits of adding gold to portfolios below:
From pharaohs to photosynthesis: the industrial and investment case of gold
Interest in gold is as old as civilization itself, with the earliest known usage of the metal dating back to the early Bronze Age (4th millennium BC). Today, demand for the metal continues to come from central banks, investors, jewelers–as well as commercial applications. Scientists have even developed a way of achieving artificial photosynthesis through leveraging gold particles as a catalyst.
Still, a high proportion of annual demand for gold is based solely on investment demand. This can expose the price of the metal to a large amount of speculation. The World Gold Council data suggests that only 59% of demand is for commercial uses; 26% of 2018 gold demand was for investment purposes while another 15% was demanded by central banks.
Three reasons to consider holding gold
Against that backdrop, there are three arguments for holding gold in a portfolio:
1. Historically, gold has been a diversifying compliment to a traditional stock and bond portfolio throughout market cycles. The below matrix illustrates that the correlation between monthly returns of gold and other asset classes has low or negative correlations to other major asset classes.
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By Koos Jansen, Global Research
“The central bank of Germany, BuBa, has just released the numbers of their gold repatriation activities in 2014. More than expected the Germans shipped home 85 tonnes of gold from the Federal Reserve Bank of New York (FRBNY),previously BuBa hinted at withdrawing 30 to 50 tonnes from New York in 2014, from France 35 tonnes were returned. Below we can see an overview from BuBa of all repatriation activities since 2013:
Source: Bundesbank Read more »
Stocks have outperformed every other asset in the long-run. In shorter, specific periods however this can vary. Meanwhile, cash is in fact not king as it struggles to keep pace with inflation.
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Gold is moving out of western markets and into eastern markets, a new report from the World Gold Council highlights. “The recent dynamics of the gold market have worked to ensure that lower prices (caused, in part, by ETF outflows) boosted Asian demand to an extent sufficient to absorb the gold flowing from western markets,” according to the report.
Here’s how it works: Gold continued to work its way through the supply chain, to be converted from London Good Delivery bar-form, via the refiners, into smaller, Asian consumer-friendly denominations of kilo-bars and below. This process is borne out by recent trade statistics. Data from Eurostat show exports of gold from the UK to Switzerland for the January – August period grew more than tenfold, to 1,016.3 t. Consumer demand in China and India dwarfs the rest of the world. Check out the chart:
The global gold supply reached 4,477 tonnes in 2012, with the gross value added (GVA) of the entire market estimated to be in excess of $210 billion, according to a new report from PwC. But who actually holds the shiny yellow metal? Take a look at this chart from the report showing global gold demand in 2012. Central bank purchases accounted for 12% of demand, while individuals’ coin and bar purchases accounted for 29%. Jewellery had the largest share, at 43% last year.
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Congress’ inability to arrive at a short-term budget deal has led to a government shutdown. Investors worry about the impact this has on their investments. There have been 17 U.S. federal government shutdowns since 1976, and Scott Minerd at Guggenheim Partners analyzed eight of the shutdowns in the past 30 years. From Minerd:
“Excluding drastic moves in commodity prices and bond yields in the late 1970s, analysis of eight occasions during the past 30 years reveals that U.S. equities and the dollar tend to decline during shutdown periods, while gold and commodities tend to perform well. Shutdown periods do not appear to have a significant effect on 10-year Treasury yields. Historically, when a shutdown ends, market performance reverses quickly, and Treasury yields fall by an average of 22 basis points over the following 10 days.”
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Gold as investment has been discussed extensively the past few years leaving investors questioning whether or not to invest in this commodity. By breaking down the reasons investors buy Gold and looking at historical price trends, we hope to help explain why Gold is not truly an investment, but rather it is a speculation. First, let us consider that the gold market recently did something it hadn’t done since 1980. It fell 13% in two days and is now down dramatically from its 2011 highs. Let’s examine what caused this recent sell-off and determine if investors should be purchasing gold.
The reason for the recent sharp decline in gold prices is twofold. First, major analysts lowered their predictions for gold prices. Then, once gold fell to $1,550 an ounce, the market was hit with a huge backlog of sell stop orders. The result was once gold broke $1550 an ounce, it went down quickly on the weight of these stop loss orders.
A reduction in global inflation also played a role. Recent Producer Price Index (PPI) numbers have been Read more »
The price of gold varied from $ 19.3/oz. to $35/oz. from 1700-1971. That is, the price has less than doubled in 200 years. In 1971, Nixon devaluated the dollar in relation to gold. Further on, during the 40 years of the Jamaican currency system, the price of gold skyrocketed from $35 to $1500 per ounce. Read more »