over 3 years ago • 2 mins
Gold's price has shot up 25% in 2020, while even the Big Tech-boosted US stock market has struggled to regain its January level. The shine is largely due to exchange-traded funds (ETFs); they’ve increased their gold holdings from $118 billion a year ago to $215 billion today, accounting for half of global demand this year.
But those buying gold, or funds which do so on their behalf, have multifarious motives. Some see the yellow fellow as a hedge against rising inflation; to others, it’s protection against a declining dollar. As the influence of such factors fluctuates, so too may demand 🥴
Financial stimulus following the last financial crisis prompted investors predicting hyperinflation to pile into gold. But that never happened – and between 2011 and 2015, its price fell 45%. And gold doesn’t even counter inflation that well anyway; taking into account the changing cost of living, it’s delivered investors an annual average return of just -0.4% since 1980 – versus 7.9% for US stocks and 6.2% for US bonds.
Gold’s inflation-adjusted price is still around 50% off its 1980 peak (which preceded it more than halving within 18 months). Much of the metal’s present appeal may therefore lie elsewhere.
US interest rates are currently at rock bottom, with others’ less than zero. With “risk-free” returns thus drying up – and the dollar’s value simultaneously declining compared to other currencies – investors may be looking to gold as something that should at least not lose them money.
But this bet against economic growth isn’t infallible. If the recovery from coronavirus comes stronger or sooner than expected, then a subsequent rise in interest rates would likely see investors desert gold’s store of value in favor of real returns elsewhere 👋
While a big “if” for now, that may give investors rushing to buy gold at its present price some pause for thought. The metal’s position in your portfolio should probably be more security than speculation…
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