Is Gold A Good Investment? - YouTube

Gold is a symbol of wealth and status that's lasted for

centuries, associated with all things luxurious from jewelry to

sports cars to even high end dining. It's one of the most

beloved and influential commodities that exists in our

market today.

Gold is unique in that it's both a commodity and a currency. So

some investors will hold it purely as a financial asset and

others may hold it in jewelry form so it can be enjoyed. But

also it's a way of storing wealth as well.

It's a really fascinating asset. It's been around for a long

time, which just shows the power of what it's been and how it's

played into the market. With an average

daily trading volume of $183 billion, gold is one of the

largest financial assets in the world. Its value has seen

explosive growth in recent years. At the start of 2000,

gold was priced at just $460, when adjusted for inflation. By

August 2021. That number had ballooned to roughly $1,815 per

ounce.

So you can see that the dollar value of holding gold has risen

over the past decade. But

not all investors are in love with gold. Warren Buffett has

spoken out numerous times on his doubts, calling it an asset with

no utility. You know,

one of the key characteristics of gold is it has no income

attached to it. It pays no income, it doesn't pay a

dividend like stocks do and it doesn't have a coupon like bonds

do, but I think that's going to become more of an issue going

forward.

So how valuable is gold as an investment? Gold is an enticing

asset for investors. It's been around long enough to feel

reliable, durable enough to be stored long-term, and scarce

enough to be considered precious. Compared to other

precious metals. It has a wider variety of real world

applications that provide a constant demand for the metal.

It's extremely malleable and it's easy to work. If we look at

the breakdown of demand, most of gold's demand is consumed by the

jewelry sector. And then we tend to have a much more volatile

piece maybe up to a third or 40% that's consumed by the

investment sector. But when we look at the technology component

that's much smaller, it's normally around 10% and a little

bit smaller.

Central banks and financial institutions also play an

important role in the demand for gold. In 2021, central banks

eld more than 35,000 metric ons of gold, about a fifth of

ll the gold that's ever been ined. The International

onetary Fund holds about 2,814 metric tons of gold valued at

around $158.5 billion.

It's partly historical. I mean until the 1970s, large portions

of the world including the US were on the gold standard, where

they basically fixed the value of their currencies relative to

gold. And that basically meant that, you know, a very large

portion of central bank reserves had to be held in gold.

So we've seen over the past couple of years, central bank

buying has picked up and in fact, in 2018, we saw buying in

excess of 650 tonnes. So the appetite to buy gold continues

to persist. Yes, we've had periods where we saw central

banks reducing their gold holdings. But broadly, we've now

seen central bank holdings reach their highest levels since 1999.

Many investors use gold as an asset to diversify risk due to

the fact that the metal is known to hold its value over time. We

can

see that if we look at the inflation adjusted value of

gold, looking at the real price of gold today, we can see that

it's pretty close to the levels that it hit back in 2011, but

also the highest that it hit back in 1980. So when we adjust

the price, whether we're looking at the GDP deflator, or whether

we're using U.S. CPI, we can s e that gold has pretty much he

d its value through decades

Throughout history, gold has been most popular for its

ability to hedge against any sort of market volatility. Take

the great inflation of the 1970s, for example. Between 1970

and 1979, the US suffered from one of the worst inflation rates

in recent history. Within this period from 1973 to '79, gold

showed an impressive return of 35%, an enormous gain compared

to any other commodity,

The dollar and gold had an inverse relationship. So as the

value of the dollar, you know, US currency is debased, pulls

back, often times gold moves in the other direction so it moves

positively. You know, in situations like that, because

it's not as susceptible to inflation, it doesn't lose its

value like other assets do and that's generally from a macro

perspective why investors invest

in gold. The same goes for deflation as well. Gold tends to

be the most sought out commodity during times of economic or

financial crisis. Between 2008 and 2012, following the Great

Recession, the value of gold increased dramatically from

about $1,150 per ounce to around $1,970 per ounce, adjusted for

inflation. Gold prices also reached new heights during the

2020 recession caused by the pandemic, with prices reaching

an all time high of $2,021 per ounce overnight, settling above

$2,000 for the first time in August 2021.

If you look back at the last five big market correction, so,

you know, tech bubble, global financial crisis, you know, all

the way through to the COVID crash of last year, you know,

your average s&p 500 was down about 28% on average, gold was

up about 11% on average.

It's because gold has proven its value in being a liquid asset,

an asset that can be used to meet margin calls elsewhere and

then still be able to retain its value.

But whether gold is great for hedging is widely debated among

experts.

It's widely discussed and argued whether gold is a greatest

inflationary hedge. And I would argue it's probably not I think

equities are, but I do think it plays a role.

More recent analysis has shown that gold's correlation to

inflation has been relatively low. In general, it's yielded

mixed returns for investors during high inflationary

periods, suggesting that using gold to hedge might be more of a

gamble than a safe bet.

Gold can be good for hedging, it depends on the type of risks

that you're trying to hedge. So if it's systemic risk, then gold

can be an effective hedge. If it's something that's much more

unique to say, one particular country, or it's a risk that

isn't system wide, then it's not particularly effective hedge. So

we have had periods over the past five years, where gold safe

haven role has been questioned and whether it still has a role

in a portfolio. While gold

might have won big between 1973 and 1979, gold investors lost

10% on average from 1980 to 1984, when the annual inflation

rate was at 6.5%, and another 7.6%, from 1988 to 1991 when

inflation sat around 4.6%.

Gold is not necessarily a perfect hedge against inflation,

but it can be a strategic hedge against inflation. So if gold is

held for a period of time before inflation picks up so various

studies have shown us that if gold is held for 12 to 18 months

before inflation takes higher, and then it's held for an

additional 12 to 18 months while inflation moves higher, it can

be a good inflation hedge. But if it's just bought for a short

period, let's say a month, it may not prove to be an effective

inflation hedge. As

a long term commodity, gold also come short in terms of returns

compared to stocks and bonds. Since 2011, the s&p 500 showed

an annualized return of 14.55%. The annualized return for a

10-year Treasury note set at just 2.57% for the same period.

In comparison, Gold's 100year annualized return was below zero

at -0.05%.

My concern with gold and commodities like this is more

about the long-term yield. You know, so you have these macro

events, these exogenous events like we just dealt with last

year with COVID and geopolitical issues. I think generally as we

move into a different cycle, gold is not as great a performer

as we move into a normalized environment.

Warren Buffett is perhaps the most well-renowned figure for

his dislike of gold. He has considered gold to be an

unproductive asset that pays no dividends or interests. In

August 2020, Buffett made headlines after purchasing $562

million worth of shares in a gold mining company. One year

later, Berkshire Hathaway's 13F filing later revealed that he

had exited the gold position altogether by the end of 2020,

reaffirming his investment philosophy on gold.

It's prudent portfolio management to have maybe a small

allocation. But this is not an asset that you want to be

heavily entrenched into if you're looking for long-term

yield. So I would agree with Warren 100% from an investor

perspective,

Other commodities like cryptocurrency and even silver

have also gained immense popularity in recent years,

challenging gold status in today's economy. However,

whether it'll actually succeed in toppling gold is a different

story.

If you're perhaps looking for exposure to a commodity, that

gives you some of the macro exposure, but also a greater

commodity exposure when it comes to industrial usages, investors

may prefer silver. But if you're looking for a commodity, or

investment that is more exposed to the macro environment, then

investors tend to turn to gold instead.

I think now there's a lot of conversation about, you know,

digital asset being deemed as stored value whereas gold has

always been deemed as store value. I think that will chang

and evolve over time. So to b honest with you, I do not see i

as competition in the long run I think both asset classes ca

play in this market and that' what makes them market. So it'

very kind of exciting to see ho they both develop alongside eac

other

If history has proven anything, the influence that gold has over

the world isn't going away anytime soon

I think you need to be just aw re that these bull markets do

't last forever. And the longer they go on, the more you just n

ed to, I think be looking at the e again, these sort of rainy

ay assets, you know, like gold, think you always want to be hol

ing them. The question is just s rt of how much.

Certainly compared to the prices that we've seen over the past

five to 10 years, we think gol prices will remain ele

ated. And then we might therea ter, we might see another move h

gher in gold prices, but we thin in the near term there's more

upside risk, and then towards the end of next year, we are

likely to see gold prices s arting to trend lower.