Gold – A brief view…


Gold is tangible and has a long history upon which to draw conclusions

Gold is a currency that has been used since Roman times. It cannot be manufactured and it does not perish. It is difficult to value because it produces no income but we have data on gold prices going back over 800 years and so we can assess of how its price has behaved in different circumstances. This study enables us to draw a number of conclusions, some reliable, others less so.

Gold is a poor hedge against inflation over meaningful time horizons

Over thousands of years gold has maintained its purchasing power. However, over shorter periods it has often proved to be a terrible inflation hedge. From 1980 to 2000 gold investors lost around 80% of their capital in real terms – and this was an inflationary period. Between 2000 and 2020 – a period of low inflation – gold investors made real returns of 6.3% per annum in excess of inflation. The two seem unrelated in practice.

Gold is close to its highest real price in 800 years

Because it is difficult to value, the price of gold fluctuates wildly as speculators get overly optimistic and pessimistic. One thing we have learned is to be wary of buying at peak prices and, today, the real price of gold is not far off an 800 year peak. Whether this information has any investment merit is not clear. Are we feeling lucky?

Gold can provide insurance against major equity downturns and, possibly, Armageddon

A real plus is that gold tends to provide positive returns during equity market downturns. It is not 100% reliable but it seems to work more often than not. What is not clear is whether gold is cheap insurance or very expensive insurance at today’s prices. Potentially, gold also provides insurance against a global collapse in civilisation. Maybe.

Beware spurious correlations

Gold has fascinated investors and analysts for decades. In the absence of hard valuation metrics, many resort to showing cause and effect charts – which work, until they don’t. The most popular today centres on real interest rates. It seems to work – but we don’t place a lot of weight on it. And, in any event, it says “don’t buy gold.”

Avoid for now unless you are a true believer

We like the insurance aspect of gold but are concerned at buying assets at close to peak valuations. We would be more comfortable with prices closer to US$1000 than US$2000 per ounce.

If you are a true believer and expect to see prices heading much, much higher, by all means buy. But, as those early adopters, the Romans, would say – caveat emptor. Let the buyer beware.