Gold has become (again) one of the favourite investments for many investors, including some financial gurus like Ray Dalio. Below are a few things you should know about gold if you are considering investing in it.
Buy gold if you think the world is heading towards another recession
From ancient times gold was treated as great storage of wealth. When things are getting worse people seek safety in assets that preserve value and hence buy precious metals and government bonds. The logic is simple — if you expect most other assets to lose value (as is often the case during an economic recession or financial crisis) you buy those that should protect your money.
This time is no different — I already explained here what we are observing in the bonds market. Gold has benefited in the same way what is obvious when looking at its price action this year (+16% in USD terms).
Buy gold if you think inflation will rise or the value of traditional currencies will fall.
Gold supply is limited so people regard it also as a good hedge against inflation. That is also one of the reasons why even central banks around the world keep some part of their reserves in gold.
Some investors believe, and I tend to concur, that next recession might lead to more printing money and buying assets by central banks. Without going into much detail, the consequence might be that investors will be more attracted by an alternative form of money like precious metals (or even bitcoins). The more doubts there are about traditional currencies, the better for gold.
It is not all about the price of gold
Price of gold globally is expressed in USD. What it means is that the price of gold is not only dependent on factors affecting demand and supply of gold but also factors affecting the valuation of the dollar. Historically, the price of that metal goes up when the value of USD goes down and reverse. Put another way, it matters in which currency you going to buy gold.
If you are investing in gold and your base currency is not USD you should keep in mind that your price of gold will depend also on currency moves. To give you an example. Let’s assume your base currency is EUR. You buy gold and pay for it 1000 euros (just for simplicity argument). If the price of gold in global markets (so expressed in USD) goes up by 10%, your investment should also go up by 10%. However, if at the same time the price of EUR vs USD also goes up by 10% the value of your gold will still be 1000 euros. Obviously, some funds will offer you solutions which are currency-hedged but you should check that before deciding and be aware of all the risks.
Obviously the same mechanism might work in your favor. So far this has been exactly the case this year. Investors who bought gold in euros made significantly more profits than investors buying gold in dollars (+20% vs 14% in dollars).
It has already appreciated a lot.
Just looking at the numbers above it tells you a lot. There are different measures on how to look at gold’s price and most of them already suggest it is relatively expensive. Certainly, it does not mean it can’t get even more expensive but asset prices rarely go up in straight line for a long time. If anyone is thinking about investing right now it is probably worth making sure we have a long term investment horizon and try to average the purchase price (by adding in tranches spread out in time), just in case there is a correction.
Gold does not yield anything.
It is worth only as much as other investors are willing to pay for it. If you own a house you can rent it out and get an income. If you own equity it usually pays dividends. If you own a bond it pays you coupons. Gold does not pay you anything.
You can buy physical gold or invest indirectly through the funds that invest in gold.
Obviously, holding physical gold seems much safer but there are a few drawbacks with that:
- There are usually high costs of acquiring it (you need to pay to the middle man)
- You need to store it safely somewhere which is also costly
- Once you need to sell it you need to find the buyer (and hope he does not charge you high commission)
So does it mean investing in funds is better? I would say yes. The only reason why I would invest in physical gold is to protect against broader financial system collapse. That can obviously happen one day but hopefully, we are still very far from such a dark scenario.
Should I buy it or not?
I’m not intending to give financial recommendations but I can tell you why I hold gold (via ETFs) as part of my private portfolio.
Firstly, I agree the world is heading towards some kind of recession. I don’t know when exactly that will happen but we are definitely in the later stage of that business cycle so chances for the downturn are certainly rising.
The second reason has more to do with my profession and each person should assess it individually. I work in the financial sector. That means that my future earnings are more or less dependent on the state of the economy and the financial sector. If we head into recession it is reasonable for me to expect lower compensation and in the worst case even loss of a job. Therefore, for me, it makes sense to invest my private savings in assets that work as a hedge to my work-related revenues. Each person should assess that individually -if you work in a sector which is independent of economic cycles or even if you expect higher earnings if things get worse than your approach towards investing should be different to mine.