Gold prices are now at 1050 USD per ounce. Ten years ago, in 1999, they were 288 USD per ounce. That’s a rise of 264% which works out to an annualized increase of 13.8% per year. This is far better than what the US stock market did. So, should we all be rushing into gold now? To be honest, I am cautious.
I am far more positive on equities than I am on gold. But firstly, here’s why gold is going through the roof. People are moving into gold right now because the US dollar is falling, and there is a fair amount of worry that it will crash. And the reasoning is that in a huge crash for the USD, then the only good of store of value would be gold. It also helps that a group of investors believe that there will be hyperinflation, and in that scenario, paper money will also see its value shrink while gold will not.
Now, here’s the reason why I am cautious, if you look at this history of actual gold prices, it is not an asset class for the faint hearted.
I ran some numbers. On a calendar year basis, over the last 88 years up till the year 2008, Gold had 44 positive years, 11 years of 0% returns, and another 33 years of negative returns. In percentage terms, this means that 50% of the years were positive, 12.5% of the years were absolutely flat, and 37.5% of the years were negative. It should also be noteworthy that including this year, gold has been on a 9 year bull run. The last time gold had a bull run similar to its current one, was in the seventies. Gold went from 35 USD per ounce in 1970 to 589 USD per ounce by 1980 (It hit a high of around 850 USD at its peak on 21 January 1980). After that, it fell all the way back down to ranges at 280 USD over the next 20 years before it started on its current bull run again.
The thing is, the asset class can go absolutely nowhere for 20 years! And this is not an isolated trend. From 1935 to 1967, gold price went absolutely nowhere! That is 32 years! I am all for long term investing, but 32 years of an investment going absolutely nowhere would be terrible even by long term investing standards.
When gold surges, it can charge up substantially over a few years, and after that, it could be a multi decade wait in the doldrums for its next bull run. This makes it extremely scary to hold as a main investment strategy. This is one of the main reasons why I hold a precious metals fund instead of just gold, and even my precious metals fund, which is up 33% since I bought it, is barely 1.6% of my total portfolio. It is more to hedge to a certain extent against hyperinflation and USD crashing rather than a main strategy.
The key thing is, I believe a recovery is in the works, and with that, company earnings will improve as the global economy gets back on its feet. Hence, I am bullish equities. However, what is gold? It is mainly a store of value. Its practical uses as jewelry is definitely not the reason why it should be surging to over 1000 USD per ounce. If people didn’t believe in gold as a store of value, its price would plummet. So, unlike companies, which are striving to improve their productivities, and have the leeway to adjust prices, go into new business, etc, gold is just gold. Its not even essential like oil, or rice, or bread. People can choose not to use gold as a store of value, and they won’t be any worse off, unlike how if people didn’t want to use oil, then everyone would have to stop driving, and all the machinery in the world would stop.
So, while I acknowledge that gold has had a tremendous run so far, I am cautious on it. I actually have a precious metals fund that would continue to go up if gold price continues to move up, but I am not betting the farm on this. The history of this asset class over the last 88 years makes it a scary one to hold. So, I would only have it in my portfolio as a form of hedging. If you want to make big bets on this yellow metal, then be prepared to be very nimble, because when the party ends on this, it could be a very long time, and I am talking about decades here before the next gold bull run revisits again! So, if you happen to be the last one holding on to gold assets when this gold bull run ends, its going to be very painful.
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