A Note on Gold

Gold is a fascinating asset and concept. From Egyptian Pharaohs to Sir Isaac Newton to the “Nixon Shock” in the 1970’s, gold has been part of the story. Oh, and by the way, its price has risen over 35% so far in 2020.

Over the years there have been reasons (and not) for an investor to buy gold. One of the “catches” is that gold can be an extremely volatile asset, depending on the global economic cycle, level of interest rates and expectations for inflation. Another catch is that there are multiple ways for an investor to buy gold. Among these ways is to purchase gold in its physical form and insure and store it (expensive) or to purchase gold jewelry or gold wristwatches (also expensive but much simpler). OR, gold can be purchased in a non-physical form through gold futures contracts or via an exchange traded fund, or ETF, like the super-widely held SPDR Gold Trust whose trade symbol is GLD. The GLD trades like a stock and may be the closest way to own gold without having actual possession of the gold bars or coins.

bullion gold gold bars golden
Gold as an investment is not always as glittery and beautiful as the pure form.

Why the big investor fuss over gold in 2020? The answer can get “into the weeds” fairly quickly. There are multiple factors involved but the price of gold is probably most correlated with the level of US and global interest rates and the expected rate of inflation. In addressing only these two factors:

  • Level of interest rates. Currently US interest rates are at an extreme at near-zero, as set by the US Federal Reserve. The Fed has pledged to keep rates at near-zero through 2022.
  • Expected rate of inflation. Currently inflation is NOT expected to perk up due to the global economic slowdown from the coronavirus pandemic; but technically and economically-wise inflation is a risk with near-zero interest rates AND the trillions of US dollars having been printed and yet-to-be printed for economic stimulus.
  • Historically, any inkling of higher inflation has greatly influenced the short-term price of gold to the upside.
  • Typically, low rates can fuel inflation (think, zero rates = inflationary) whereas when the Fed raises rates, it is in order to tame inflation.

All of these factors bring us to where we are today with the price of gold sitting at just over $2,000 per troy ounce, an all-time record set earlier this week. Does this mean an investor should own gold? Or go out and buy gold? It can make sense to own “gold for all seasons”, as in own gold as 5% of a portfolio. But even that philosophy is not proven to be super-additive to long-term portfolio gains. AND – be ready for a roller coaster ride: just since 2006 there was a BIG up move (2006-2011) followed by big down (through 2015)…followed by several ups and downs through 2019 and now a fast, big move up in 2020.

The timing is super-risky and even more important questions are: how much gold to own as a percentage of investable assets and how to own gold – physical or non-physical? Perhaps gold is best owned in its physical form as jewelry or a watch (or multiple watches) – or for those who want to have “a store of value” for the unlikely end-of-the-world scenario stored in a safe at home. Gold as an investment is not always as glittery and beautiful as the pure form.

 

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