Welcome to MutualFunds.com
Please help us personalize your experience and select the one that best describes you.
Your personalized experience is almost ready.
Check your email and confirm your subscription to complete your personalized experience.
Thank you for your submission
We hope you enjoy your experience
By definition, a store of value is an asset that maintains its value without depreciating. Gold’s ability to maintain wealth by preserving purchasing power has been well documented. Civilizations throughout history have turned to gold as a means of exchange as well as a hedge against currency devaluation.
Gold’s finite supply also helps boost its appeal as a store of value. To date, all the gold mined throughout history would fit into two and a half Olympic-sized swimming pools. According to the US Geological Survey (USGS), approximately 187,000 metric tons of gold has been mined in total, with 57,000 metric tons remaining underground.
Critics of gold state that it is an antiquated means of exchange with little utility or industrial application, outside of jewelry, and should therefore not be considered a store of value. Specific to utility, their argument could be viewed as valid. But what gold lacks in utility, it makes up for in investor psychology. Humans have long placed value in gold. While this value may very well be due to its historical reputation, until this connection is broken, gold will remain one of the primary assets used to preserve wealth.
For longer-term investors, it is important to have the correlation between the various asset classes (read: stocks, bonds, alternatives, cash, etc.) held in their portfolio be as close to zero as possible. This allows investors to better manage the risk of their portfolio and increases the likelihood that the share price of investments held in different asset classes will not move in the same direction in response to current economic and market trends.
Gold is a unique asset in that it has a low, or sometimes even negative correlation to the other primary asset classes typically included in a properly diversified portfolio. In fact, as you can see from the above graph, it tends to have a negative correlation to US equities, hence sometimes being described as a “flight to quality” asset.
us, market and economic crises can and do happen.
Given its negative correlation to US equities, gold can provide needed insulation to your portfolio, helping it to better absorb these inevitable pullbacks. While it will not completely offset equity losses, gold can help reduce volatility and provide “downside insulation” to a portfolio.
As the chart below shows, with the exception of two instances, the 1997 Asian financial crisis and 2013’s “Taper Tantrum,” gold has achieved positive returns during times of equity unrest. It also has a tendency to outperform US Treasuries during these downturns, which many view as another safe haven asset.
One of the most famous investors in the world, Warren Buffet, is an outspoken critic of gold ownership for these very reasons. He has been quoted as saying,
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
…and Mr. Buffett would be correct. Gold has little to no real economic utility, does not generate sustainable cash flow, and does not pay a dividend.
What it does offer is relative stability and the potential for price appreciation. During turbulent economic times when company cash flows decline and dividends are cut or reduced, gold tends to shine, as investors try to preserve capital and fear the inevitable stimulus measures taken by central banks and/or government could stoke inflation and decrease the purchasing power of their currency.
More recently, financial markets have also been grappling with historically low interest rates, with some countries even experimenting with negative interest rates (i.e. investors paying the government interest, instead of receiving it, when owning government-issued bonds). This has significantly lowered the opportunity cost of owning gold (which pays no interest) versus owning government-issued bonds (which pay interest) as investors look for safety during times of market unease. Gold has been a direct beneficiary as the declining interest rate trend has gained steam, particularly in countries issuing bonds with negative interest rates. Why would an investor choose to pay interest to own a government bond when they could own gold instead, achieving the similar end goal of capital preservation?
It depends on what you believe. Some have argued that the declines in the price of gold, at the exact same time equities were dropping precipitously, debunks the theory that gold should be viewed as a safe haven asset during times of market turmoil. Especially coupled with the fact that US Treasury bonds and the US dollar remained strong throughout the collapse in equity prices.
Proponents of gold have argued that the price decline the metal suffered in March, 2020 was due to the rapid shock the US economy experienced as virtually all of us entered lockdown. This forced many investors to raise cash as rapidly as possible, and gold, being a very liquid asset, provided easy access to needed cash. These proponents would challenge that the price of gold acted similarly during the 2008/2009 financial crisis before ultimately touching all-time highs, not too different to what has happened over the last three months.
By analyzing the above chart, we are able to see that initially gold did maintain its strength as equities began to move lower. As the equity losses accelerated, gold prices declined before beginning a steady march higher prior to the March 23 low in equity prices. This does lend credence to the claim by gold “bulls” that the metal was used as a source of cash by investors during the selloff, and in doing so, helped them limit their losses.
Towerpoint Wealth, 500 Capitol Mall, Ste.1060 | Sacramento, CA, 95814