It was billionaire hedge fund manager Paul Singer who said, “If you want an alternative currency, check out gold. It has stood the test of thousands of years as a store of value and medium of exchange.” With 2020 looming and none of the geopolitical events that rattled the markets in 2019 resolved – think about Brexit and the US-China trade war – as well as the likelihood of a bitter US presidential campaign, Singer’s words seem more significant than ever for investors.
Certainly, 2019 has again highlighted gold’s “safe haven” status with the price, in Australian dollar terms, rising 29 per cent in the 12 months to 15 November. Taking the long view, since gold became a freely traded commodity in 1971, it has enjoyed an average of 11.7 per cent annual price rise in Australian dollars. While this return comes without income, it has still outperformed commodities and debt and is on a par with share markets over this timeframe.
Although geopolitical events provided much of the explanation for gold’s lustre in 2019, they weren’t the only themes influencing the price.
Volatile equity markets, interest rate cuts as monetary authorities responded to slowing economic growth, both domestically and overseas, central bank buying and selling, and those looking for an inflation or currency hedge, also contributed.
For many investors, however, gold’s primary appeal as an investment vehicle lies in its resilience in troubled times, with the 1987 share market crash and the global financial crisis (GFC) as two prime examples. In 1987, it advanced 6 per cent while the S&P 500 went backwards by 33 per cent; in the wake of the GFC the difference was even more stark, with gold up 26 per cent while the S&P 500 fell 56 per cent.
Gold’s performance in the wake of the 1987 share market crash highlights another investment characteristic of gold – it’s total divorce from movements in equity markets. For investors, this can only be good news, as it provides genuine diversification in their portfolios. Even with commodities and fixed interest, it has minimum correlation to price changes in these asset classes.
There is another factor at play with the gold price that investors should not forget – consumer demand. It helps explain why the gold price can rise when economies are strong and markets buoyant; consumers are more likely open their wallets and purses to buy jewellery and technology products.
The World Gold Council’s latest Consumer Research Report highlights gold’s consumer appeal, finding it remains a mainstream choice for global investors with 46 per cent (there were 18,000 respondents) choosing gold products allied with consumer preference for jewellery made from gold over other metals. The report also shows gold is the third most consistently bought investment (45 per cent) behind saving accounts (78 per cent) and life insurance (54 per cent).
Perhaps more significantly, the research reveals that more than a third (38 per cent) of retail investors and consumers have never bought gold but are not averse to the idea – potentially a positive for the price.
Pulling all these influences on the gold price together explains why it’s difficult to forecast future movements. A company downgrades its earnings forecast; investors sell. The Reserve Bank cuts the cash rate and bond prices rise. But with myriad factors potentially having an impact on the gold price, market timing is that much harder.
But investors know one thing; over time that price has appreciated. For that reason, it’s an investment to buy and hold, a strategic holding in a diversified portfolio.
Kris Walesby, chief executive, ETF Securities