The demand for physical gold has fallen to its lowest level in 11 years, according to the World Gold Council. But what does that mean for investors? Not much, apparently.
The price of gold has risen slightly in the past couple of months, despite the December quarter report on a slump in global demand. This raises the age-old question about the worth of gold as an investment.
Similarities between gold and cryptocurrencies now are becoming commonplace, but the facts that neither of them produces an income, both can be price volatile, and both are environmentally unfriendly are just about the only factors they have in common. Plus, they both fail the normal tests applied by professional investors, but a lot of other assets do that as well. Check out so-called collectibles.
A lot of homely sayings are attributed to Warren Buffet, arguably the greatest living investor and poster child for fundamental value investing. He is not a fan of gold. He is reported to have said: “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
That’s a more colourful way of saying gold does not produce an income. That is a little disingenuous. About 78 per cent of mined gold is used in jewellery, with India being the biggest consumer, and a few other percentage points in electronics-related industries. The problem here is that jewellery only has value if people say it has value.
The most-cited reason for the gold price steadying and outlook seeming a little brighter than last year is the rising fear of inflation coming from continued fiscal and monetary stimulus programs, particularly in the US. This has meant only a plateauing in the price at US$1,712 per troy oz on March 28, compared with a 12-month peak of US$1,950 on January 6. Overall, last year, the price of gold was up 6 per cent.
But gold has never shown itself to be a good hedge against inflation over the medium-long term. The lowest price for gold in the past 100 years was US$233 in1970. After adjusting for inflation, the highest price ever for gold was US$850 just 10 years later, in 1980. Prior to 1970, it had fallen steadily, through inflation, deflation and stagnation, since the 1930s.
According to the US dealers Money Metals Exchange, the inflation-adjusted price of gold hasn’t changed much for 100 years (then around US$20 an oz) but the firm points out that the US dollar, in which it is quoted, has depreciated a massive 97 per cent in that time.
If you believe there is no logical worth to gold, you are not really investing in gold, but actually just gambling on the price going up or down. Even over very long periods you don’t know if the gold market will go up or down, unlike the long-term price of the stock market.
It is true that the gold price will tend to spike during a geopolitical or economic crisis, but they are notoriously difficult to predict. You either have to be lucky or keep repeating the same bet.
The Australian edition of the research note from the World Gold Council, ‘The Relevance of Gold as a Strategic Asset’, published in February cites five of what it believes are structural changes boosting gold’s risk/return profile and attractiveness in a diversified portfolio:
. Monetary policy. Persistently low interest rates reduce the opportunity cost of holding gold and highlight it as a source of genuine, long-term returns, particularly when compared to historically high levels of negative-yielding debt
. Growth in emerging markets. Economic expansion – particularly in China and India – increased and diversified gold’s consumer and investor base.
. Rise of gold ETFs. Gold-backed ETFs have facilitated access to the gold market and materially bolstered interest in gold as a strategic investment, reduced total cost of ownership and increased efficiencies
. Central bank demand. A surge of interest in gold among central banks across the world, commonly used in foreign reserves for safety and diversification, has encouraged other investors to consider gold’s positive investment attributes. This tends to ebb and flow, however, with bank sales outnumbering purchases over a 20-year period, and
. Market risk. The global financial crisis prompted a renewed focus on risk management and an appreciation of uncorrelated, highly liquid assets such as gold. Today, trade tensions and concerns about the economic and political outlook have encouraged investors to re-examine gold as a traditional hedge.
The research note includes a calculation, based on actual returns between 2010 and 2020 for Australian super funds’ average allocations, which shows a portfolio with 5 per cent gold would have produced an annual return of 7.1 per cent, compared with 7.2 per cent for the portfolio with no gold, but with a reduced volatility score of 5.7 per cent, against the non-gold portfolio’s 6.1 per cent. Over 20 years, according to the World Gold Council, a portfolio with 5 per cent gold will outperform, 5.0 per cent versus 4.8 per cent, also with a slightly lower volatility.
Intuitively, one should be sceptical about the assumptions used for the calculation. Still, there are some statistics local investors to ponder about gold which are indisputable. For instance, Australia has the largest known total of gold reserves in the ground of any country, followed by Russia, and the Reserve Bank of Australia had the largest holding of bullion of any central bank, at about 80 tonnes, as of last December. Australia usually among the top producers of gold in the world too: it was the biggest producer in 2018 but have slipped to fourth spot as of last year.
And what do those factors mean for Antipodean investors? Not much either, apparently.
Greg Bright is publisher of Investor Strategy News (Australia)