One kilo gold bars. Photo credit: Dario Pignatelli / Bloomberg
The frequently quoted line of the Merchant of venice is fit: “All that glitters is not gold.” But gold has been shining a lot lately. As the price per ounce rises to its all-time high, the question is whether this is a good thing to buy now. The answer: no.
Not at these prices, because the yellow metal is notoriously volatile. Unless you’re a skillful entry-exit commodity trader, which isn’t many people, or a long-term investor, who should be, then gold is a troublesome hold. Certainly in any large quantity.
Gold ended last week at $ 1,897 an ounce, setting a record high, beating the previous vertex, reached in 2011. Significantly, the record reached nine years ago was during another difficult time, after the financial crisis and the Great Recession. So the new threat of the European sovereign debt disaster seemed poised to push the world economy back into the mud.
Physical gold and publicly traded funds and the mutual funds that track it are likely to continue to rise for a while. As Mohamed El-Erian, chief economic adviser to Allianz, explained the phenomenon in a tweet last Friday: “The rise in gold continues this morning as more investors see it as one of the least attractive risk mitigators, adding exposure both tactical and strategic portfolios. “
Amid economic recessions, political turmoil, and inflation, gold tends to prosper. Today, we surely have those first two evil forces that hit us.
Unfortunately, that damn volatility means that once the bad times are over, gold will fall like the heavy rock it is. After the sovereign debt crisis ran out in the past decade, gold lost more than 40% of its value and fell to a low of $ 1,060 in late 2015.
Well, then the trade war between the United States and China came and gold took off again. The pandemic has fueled the increase even further. Want to bet that the price of gold will stay this high and rise for a long period? Smart money doesn’t think so. Institutions, whose guiding principle is long-term investment, generally reject gold or simply keep a small amount for diversification purposes. Texas’ $ 157 billion Teacher Retirement System has less than 1% in gold.
And what about gold as an inflation hedge? While inflation hardly exists now, some fear that all government stimulus pumped into economies around the world will eventually produce a spiral of consumer prices. Isn’t gold worth keeping for that?
Unfortunately, the volatility of gold also makes it less useful as compensation for inflation over time. Since the 1970s, an era of really bad inflation, the price of gold relative to the Consumer Price Index ranged from a low of 1.47 to a high of 8.68, according to a study by the professor of Duke Campbell Harvey and former TCW portfolio manager Claude Erb. . Result: inflation adjusted, gold should be more than 50% higher than the current level to match what it was back then.
Do you want better inflation coverage? Test stocks, the profits of which generally rise as inflation heats up. That’s the conclusion of a study by North Carolina state professor Richard Warr. Calculated by decade since 1871, inflation-adjusted earnings growth rates were 21% less volatile than nominal. Therefore, Warr concluded, equity trumps gold over time. To be fair, he admitted that during periods of short-term inflation, gold may outperform.
In the prime of time, investing in this precious metal is buying fool’s gold.
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