Gold has always been mankind’s prized metal for its artistic and cultural value, with a rich history dating back to ancient Egypt.
In many parts of the world, physical gold serves as a symbol of wealth and is present in almost all celebrations of a social nature and especially in special events such as weddings. Consider that more than 1,400 tons of metal are consumed each year for jewelry and other forms of decoration.
But the real reason to buy gold goes beyond the usual annual celebrations or the need to flaunt wealth; as we have always argued throughout these pages, people can also buy metal as a form of investment and increase their wealth. This is especially true during times of high inflation, where the cost of living rises and the value of the currency depreciates as is happening right now.
The US economy is currently experiencing an extreme inflationary period, with an annual inflation rate of 8 according to the latest data) reaching 7.9%, the highest on record in 40 years.
Since early 2022, fears about inflation have kicked off a new wave of gold buying, which has nearly taken the precious metal past its all-time high of $2,070/ounce previously recorded in August 2020.
Demand for gold-backed investment products has also increased, with gold ETFs posting net inflows of 187.3 tonnes (US$11.8 billion) in March, bringing total holdings just below the August 2020 record of US$240.3 billion.
Store Of Value
The idea that gold has a monetary value was also widely accepted in ancient times and, for the most part, this principle worked in practice. In Roman times, for example, an ounce of gold was enough to buy a toga and accessories. Today, the same amount of gold can buy a men's tailored suit or a wedding dress.
We often think about the value of an object in the past and compare it to how many ounces of gold it would have been at the time. The value of gold increases as the item depreciates (ie it takes more money to buy it).
The potential value assigned to gold is what attracts investors to the metal. Throughout history, people have tended to hoard gold when their traditional "money," or currencies, are losing value because they've realized that the metal is much more durable and can be exchanged for more value later.
Inflation Coverage
As mentioned, gold is seen as the ideal inflation hedge, as its value tends to increase as inflation rises. This is because current currencies such as a US 100 dollar note lose their purchasing power as life, in general, becomes more expensive, i.e. you have to fork out more bills for the same good. In this sense, gold priced in that currency tends to increase in value.
Indeed, looking back over the past 50 years, gold prices have kept pace with inflation and the metal’s purchasing power has increased accordingly, while the US dollar has lost value and purchasing power.
For example, in 1930, 1/100 ounces of gold could buy about 2 or 3 pieces of bread while 1 US dollar could buy 11.
Today in 2022, 1/100 ounce of gold can buy about 8 pieces of bread, but with 1 US dollar, he can only buy half a loaf of bread. This means that gold has more or less kept pace with the price of bread over that period, while the US dollar has depreciated. Same thing for the Euro which has seen a strong devaluation.
Diversification
Many of today’s major asset classes – stocks, real estate, and commodities – are correlated and tend to move in the same direction at the same time. Gold, however, is driven by an entirely different set of factors and has a lower correlation.
In other words, gold’s performance moves independently and can serve as a diversifier within a multi-asset portfolio. It lines up perfectly with the good investing mantra of “don’t put all your eggs in one basket” by providing a sort of safety belt against events that could plummet the value of your investments.
More importantly, gold has outperformed major asset classes over the past 22 years, historically improving a portfolio’s returns, only by increasing diversification. It is also often significantly undervalued relative to shares, as gold’s share price ratio is currently only 38%.
It Protects Against Economic And Political Instability
Gold also offers a sort of guarantee for our investments during times of economic and political instability. During the height of the Covid pandemic in 2020, gold managed to outperform both stocks and bonds, setting a record price level. According to the World Gold Council, its performance during times of crisis has risen to become “the main reason central banks hold gold”.
This year, gold is once again attracting investor attention following the Russian invasion of Ukraine. Sanctions against Russia have already sent commodity markets into a frenzy, fueling fears of stagflation – a combination of slow economic growth and high inflation – both of which are good for gold.
