Gold Fever Time

Gold, the yellow rock that the world has been using as a value of money since the beginning of time. With the current volatility surrounding the markets, is it a good time to invest in gold?

The simple answer… YES

Now for the explanation.

Gold is a rare metal (albeit not as rare as others such as palladium) but has been the standard for value for a long time; hence the gold standard. It’s price does fluctuate through time, but we do believe owning some gold in a portfolio is a very good idea as it creates a more diverse portfolio and hedges against inflation.

Recently, the spot price of gold has been trending toward  all time highs and with good reason.

With the Federal Reserve pumping trillions of dollars to stimulate the economy and potential second wave of stimulus checks, there is a lot of currency being pumped into the market. This is not just limited to the United States as other countries around the world are also pumping money to stimulate their economies. But, basic economics tells us that this will lead to sever inflation. 

The US pumping $2,000,000,000,000 (that’s a lot of zeros, but it is 2 trillion) is a truly unprecedented amount of stimulus money being released. Comparatively, FDRs New Deal program to stimulate the economy cost the government around $700,000,000,000 (AKA 700 billion) accounting for inflation. With many Americans qualifying for a stimulus check of $1200 (and maybe even those of you reading this), that must of been a great feeling. But, don’t get too excited as there is no such thing as a free lunch. Over time, we will begin seeing things get more expensive and we will probably see the consumer price index begin trending upwards at an higher rate than in the past. 

So, this is where gold can come into play and help protect your money. Historically speaking, gold has moved with the markets, but it has also held its value quite well in turbulent times. One of the big reasons for this is because the supply of gold is limited. Unlike money which is literally paper that can be printed in unlimited amounts by the government, there is only a finite amount of gold in the ground that can be dug up. The limiting of supply then helps the price of gold. When people see the value of their currency going down, gold becomes a safe haven because there is a finite amount and you can’t just dig up a trillion tons of gold in a instant. This is why gold prices rise during periods of uncertainty such as the current COVID situation.

Gold has not historically beaten the S&P 500 over the long run, but it has proven itself in diversifying risk during many volatile periods such as that in 2008. 

This chart shows the gains of gold (yellow line), silver (grey line), total stock market return with dividend reinvestment (black line), S&P 500 (red line), and Dow Jones (blue line).

As you can see, over a 50 year period, gold does hold its value quite well. If you don’t account for reinvesting dividends, gold would even be outperforming the major indices.

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So, in our opinion, we strongly believe that having gold in a portfolio is a really good idea and with the current uncertainty and almost guaranteed inflation to come, we see gold rising again.

Helpful Tip: Careful when investing in gold

There are ETFs, companies, options and physical gold which are all ways to get exposure to gold. They all have upsides and downsides. For ETFs, you are diversified in the field of gold but depending on what you want, that might now be the right fit for you. As for companies; they still rely on their profits for valuation and if their operational expenses increase even if gold is goin up, the share price may go down so there are other factors than just gold spot price to consider. Then you have physical gold which is a challenge on its own as different form of physical gold have different premiums. Coins/ bullion typically have the highest premium and it goes down as you get to higher weight bars.