Why should I invest in Gold
Numerous events unfolded in 2022 that have increased the appeal of investing in Gold. The price of Gold has yet to respond strongly to these events, which means this could be a good entry point for both new and long-term Gold enthusiasts.
Investors who are new to the Precious metals are sensing the opportunity that Gold presents and asking the question, “Why should I invest in Gold?” In this short article we will explore some of the reasons for doing so.
To start with, there have been many geopolitical and economic developments in 2022 that have caused general investor sentiment to decline. The major Stock indexes dipped into bear markets (greater than 20% decline) at the start of the year and the NASDAQ remains in that condition. Bonds have also been in a bear market so the traditional Investment Portfolio (60/40 mix of Stocks and Bonds) has been suffering.
In addition to these financial challenges, geopolitics took a turn for the worse when Russia decided to liberate the historically Russian areas of Ukraine.
These conditions make Gold appealing because the yellow metal typically performs well during recessions and politically risky times. Gold mining Stocks are also attractive at this point because they are trading at historically low levels and they tend to outperform other Financial markets when Gold starts to rally.
Gold underperformed other Inflation hedges
One reason to invest in Gold is that the price movement of Gold has underperformed other commodities, which means there is still a lot of room for Gold to move higher. The price of Crude oil and Natural gas increased by 11-21% during the past year, while the price of Coal increased by 113%.
Many of the other commodities have outperformed Gold during the past year and there is still room for the entire commodities sector to move higher if supply issues do not improve. Investors with a long-term Investment horizon can take advantage of the current entry point and benefit as Gold plays catch-up with the other commodities.
Gold rose above $2,000/ounce during both 2020 and 2022 and has room to move higher as Inflation continues to be an issue. Inflation in the United States has been well above 7% for most of the year, and many investors purchase Gold to help protect their assets from the impact of Inflation.
Gold has the potential for a significant price increase during 2023 and 2024. It is not uncommon for Gold to deliver double digital returns multiple years in a row. For example, the price of Gold increased by 17-31% between 2005-2007, and it also rose by 27% in both 2009 and 2010. Furthermore, the price of Gold did not have a negative annual return for any year between 2001-2012.
Higher political risks
2022 has been a year of increasing political tensions in the world. However, the price of Gold has not fully responded to many of these risks. Investors often view Gold as a way to protect their assets during periods of heightened political risks, as concerned citizens purchase physical Gold or Gold mining stocks in response to risky geopolitical events.
Gold rallied strongly in the short term after Russia’s invasion of Ukraine, yet the price of Gold is still well below $2,000/ounce. While Russia and Ukraine may be able to start peace talks and de-escalate the conflict in the coming months, there are still other political risks brewing globally.
For example, China’s potential invasion of Taiwan would cause global turmoil due to the combination of geopolitical and economic risks that this event would create. Furthermore, increased geopolitical tension between Saudi Arabia and Iran could escalate, serving as another reason for the price of Gold to increase.
The increase in energy and food costs is also a catalyst for increased political risks. Countries struggling with Inflation have a higher chance of experiencing political protests, as we have seen this year in Chile, Sri Lanka, and Pakistan.
Political risks can be difficult to predict. Events such as Covid19 and Russia’s invasion of Ukraine were like Black swans – very rare and impossible to forecast. An Investment in Gold can help protect your assets and perhaps financially benefit when these types of events unfold. It seems reasonable to assume that political and economic risks will accelerate during 2023 and into 2024 as Americans head into another heated Presidential election.
Central banks buying Gold
When people think of Gold investors, they may initially think of individual investors or even institutional investors that purchase physical Gold or Gold mining stocks. There is a new trend that has emerged, however, that may support the price of Gold moving forward. Central Banks have been increasingly buying Gold at record levels.
Countries around the World are doing everything they can to protect their currency and minimize the impact of Inflation. Central Banks are increasingly choosing to hold Gold as part of their foreign exchange reserves and, in some cases, are choosing to replace sovereign debt with Gold. China, for example, is selling US Treasury bonds and buying physical Gold.
According to the World Gold Council, Central Banks have purchased Gold in 2022 at levels not seen since 1967. Their decision to do so was likely a response to rising Inflation and the poor performance of global currencies. This trend of Central Bank Gold buying could be quite bullish for the yellow metal in 2023. Central Bank buying may also spark further buying by individual and institutional investors.
Major issues with currencies
Another issue that has accelerated investor interest in Gold has been the poor performance of currencies in 2022. Major global currencies, including the Pound, Euro, and Japanese Yen, performed poorly in 2022. Gold is the ultimate form of money so rapidly declining currencies are another factor driving investors towards Gold.
The Pound reached a 40-year low in 2022, which occurred due to issues related to taxes, Inflation, and the threat of a recession. The Euro reached a 20-year low in September after Russia announced that it would shut down its major gas pipeline to Europe. Furthermore, the Yen has lost around 20% of its value against the USD during the past year. These types of currency devaluations are typically seen in emerging market countries rather than in developed economies like Europe and Japan.
Recession and Inflation issues becoming worse
The risk of a global recession and continued Inflation has increased throughout 2022, which suggests that it could be an excellent time to invest in Gold. Gold has historically performed well during these types of economic periods.
The latest data from the European Union showed that Inflation in the region was over 10%, driven by rising energy and food prices. Inflation was over 20% in Lithuania, Estonia, and Hungary. In the United States Inflation has been over 7%, which has resulted in the Federal Reserve raising interest rates to multi-year highs. Furthermore, emerging markets have also struggled with Inflation, including extreme cases like Turkey, where Inflation reached a 25-year high of 85.5%.
Research Firm Ned Davis projects there is a 98% chance of a global recession moving forward. The combination of higher Inflation and slower growth may produce stagflation conditions in many countries. Stagflation was the predominant economic condition of the 1970s when Gold rose from $35 to $850 per ounce. Slower economic growth could also result in inferior Stock market performance and pessimism from investors, who may view Gold as a more attractive alternative.
Poor Stock market performance
Some investors view Gold as a way to diversify their Portfolio performance and to provide protection when equity markets decline. The S&P 500 declined by almost 20% during the past year, which was largely due to the poor performance of tech stocks. The MSCI World Markets Index has declined by 9%, while emerging markets have declined by 20%. These declines come at a time when most investors are struggling to protect their Investments from the impact of rising Inflation.
One key trend to note is that Gold mining stocks have the potential to decline in line with equities if there is a broad market sell-off. This is one reason why it may be better to own physical Gold rather than Gold mining stocks. However, Gold mining stocks may be able to outperform in the long run, as they offer leverage during bull markets in the Precious metals.
Most sovereign debt has a negative real yield
In the past, investing in sovereign debt was seen as a risk-free way to protect your money from the impact of Inflation. The current 10-year sovereign debt yield is lower than the Inflation rate in most cases, however, which makes it difficult for sovereign debt to offer its traditional protection.
Meanwhile, the 10-year yield is lower than 5% even in countries like the United States, Italy, Australia, Canada, Japan, and Germany. This results in a negative real yield, which means that countries or people that invest in this debt can't outperform the Inflation rate.
In other words, investing in sovereign debt instruments (Bonds) is a guaranteed way to lose money because Inflation losses exceed the interest paid on the Bonds.
Let’s do a quick recap of the points we have covered:
All of these factors are answers to the question, “Why should I invest in Gold?”
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After the dot com bubble popped I started researching Financial bubbles - how they evolve, how they pop, etc. I quickly realized that Gold is the only real money on planet Earth and in 2002 I bought my first Gold Coin. I've been investing in the shiny stuff ever since - both physical Precious metals and the Mining stocks. I've also studied the Financial markets, trading, Technical analysis, and the endless games that central banks play with fiat currencies. I do my best to share what I've learned with others - that's what you'll find here on Gold Well Live.