Fundamentals of Gold Investing
As an asset class, whether it's investment class gold bullion bars, coins, or jewellery, physical gold has stood the test of time.
Like most assets, price is determined by demand and supply. Going forward demand for gold may continue to rise, while supply will remain constrained as it has since the beginning of time. With this backdrop, let's explore some specific reasons investors may consider buying gold at today's prices.
Gold competes with other assets – stocks, bonds, real estate, and paper currency among others as stores of wealth. But in today's changing and ever more volatile world, the value of these other assets may fluctuate more than ever. What's more – paradoxically – in response to volatility, the policies of governments and central banks, in an effort to dampen economic downturns and prop up asset prices, may in fact make gold more valuable relative to these other assets. The real purchasing power of gold, over the long term, may continue to rise.
- Capital growth
- Low interest rates
- Portfolio diversification
- Currency hedging
- Economic volatility and inflation
Investing in gold like any other asset class, may require a longer time horizon to fully capture the performance required. Since the turn of the century the price of gold has outstripped most other asset classes.
The table below shows actual returns over 1 year, 10 years and 15 years for gold in AUD uo to December 2014. Comparatively, traditional asset classes are given.
Clearly, over the past 10-15 years, gold has produced solid returns outperforming even Retail Superannuation.
With this in mind, astute investors allocate a portion of their portfolio to gold bullion for a balanced edge.
Low Interest Rates
As the world stagnates in a low interest environment, gold prices have been strengthening.
The reasoning is that many prudent investors withdraw from cash and allocate higher proportions to other asset classes.
The table below, reflects returns on equities, cash and gold in AUD, over a period where interest rates on average have been historically low.
Gold bullion has returned on average 24% over the period, and right now the world including Australia is languishing at record lows and it seems likely to stay the same.
Gold is the ultimate hedge against falling markets. Equities, bonds and commodities are great investments over the long term but like all markets they too fall from highs. Diversification into precious metals or gold can shoulder some of these losses and balance the return of any portfolio.
This chart shows the worst 5 year period on the Australian Stock Exchange alongside the returns of gold and cash during the same period.
Simply, where the ASX had large falls, the price of gold shot up nearly 40% on average. Portfolio diversification into gold always helps to balance out investment returns.
Economic Volatility & Inflation
Gold investors have chosen to add gold to their portfolio to hedge against inflation. Currency devalues as governments seek to ease the pain of financial suffering, and central bank policy on quantitative easing in the US, UK, Europe and particularly Japan puts the developed world at risk of higher inflation.
Physical gold protects wealth from inflation events.
Recessions, geo political tensions, economic slowdowns and financial market volatility pushes gold prices to the upside.
Escalating global debt levels are at all time highs ($57 trillion higher today then when the GFC hit) which should drive gold to fresh highs in years to come.
Gold protects against currency devaluation.
Historically, gold has also exhibited a strong inverse relationship to the U.S. dollar. Gold’s role as a store of value and its broader monetary characteristics result in it, over the long-term, comparing favorably to all major currencies in terms of its ability to maintain its relative value and purchasing power.
Consequently, gold has been found to serve as effective protection against exchange rate fluctuations during periods of economic uncertainty.