Gold dazzles the world when Wall Street is afraid. When COVID-19 panic pushed gold prices above $2,000 an ounce in August and September, that’s what happened.
During the volatile year of 2020, gold outperformed stocks, with gold prices rising 24.6%, while the S&P 500 index returned 18.4%.
Investing in gold based on your short-term prediction for stocks is pure speculation. Inflation hedge and portfolio diversifier, gold stocks or gold funds can be a worthwhile investment.
Here’s when gold investments make sense, and why they have nothing to do with stock market conditions.
1. Human civilization has valued gold for centuries
According to the World Gold Council, jewelry demand was down 29% year over year in the third quarter of 2020. A large part of the decline is due to the economic devastation of the pandemic coupled with the skyrocketing price of gold.
In spite of this, gold remains highly sought after throughout history. It was regarded as divine flesh by the Ancient Egyptians. It was called the sweat of the sun by the Incas.
The demand for gold jewelry is particularly strong today in emerging markets, such as China, where it’s given for special occasions and at Chinese New Year.
The festival of Diwali and wedding season are also popular buying seasons in India. The pandemic-related declines in these markets were the largest.
However, gold’s cultural and historic significance throughout civilization cannot be reversed by the Coronavirus. If jewelry demand tanks during a recession, gold will hold its value.
2. Gold supplies remain scarce
It could be condensed into a cube of 21 meters on one side if all the gold mined in human history was merged together.
This is roughly enough to fill 3.7 Olympic-size swimming pools. Gold is abundant in the Earth, despite popular belief.
There’s just one problem: mining it is extremely difficult, and most sources do not contain enough gold to make mining profitable.
The chances of a mine being developed are less than 0.1%. Before gold can be mined, exploration and development phases can take a decade or more.
A limited global supply of gold is one reason why gold prices remain high, since gold mining is complicated with current technology.
3. Gold is less volatile than most other commodities
Commodities have a low correlation with stocks, so their prices do not move at the same pace as stocks. Stock market returns tend to diverge from those of commodities.
As inflation rises, commodities are also a common inflation hedge. Gold prices have historically performed better when inflation is above 3% in the U.S.
Nevertheless, commodities as a whole are highly volatile, given that unpredictable factors like weather, natural disasters, and political instability can cause huge short-term changes in supply and demand.
Investing in gold can also be volatile in the short term due to investor sentiment, but the metal is one of the most stable commodities.
Gold demand is pretty constant overall. The jewelry industry, which accounts for 50% of its use, tends to be a steady source of demand, but it drops during economic downturns.
Demand is driven by central banks and investors, including individuals and exchange-traded funds (ETFs), but peaks during downturns.
As gold sources are so difficult to find and develop, mining activity does not respond quickly to price fluctuations, so the supply remains steady.
4. Gold’s industrial use is limited
Gold is used in fields such as electronics, medicine, and dentistry. However, only about 10% of worldwide gold demand is driven by industrial production.
Gold, therefore, is relatively insulated from a manufacturing recession, even though it isn’t protected from a consumer recession in which consumer spending plummets.
Silver, on the other hand, is used for industry more than half of the time, which is why prices for the white metal tend to fluctuate more with the stock market.
5. Interest rates are likely to remain low
Gold makes sense for those looking for a safe-haven asset when interest rates are low, since other safe-haven investments, like U.S. Treasuries, don’t offer much return.
Through at least 2023, the Fed plans to keep interest rates near zero. Due to this, gold could remain a popular investment for quite some time.
Investing in bonds will make more sense once interest rates begin to rise again for those seeking returns that can outpace inflation.
Is gold a good investment?
Stocks may outperform gold in volatility years like 2020, but the S&P 500 has historically outperformed gold over longer holding periods.
If you are worried about stocks crashing, investing in stocks and committing to a long time horizon is a better option than gold. Gold can offer some peace of mind if you’re seeking a short-term bear market hedge.
A good investment strategy only works if you act before the panic ensues. Buying gold when gold has reached a record high that’s likely to be short-lived due to widespread investor nerves is the worst thing you can do.
Even if you want to invest in gold, owning physical metal may be a hassle. Metal will need to be stored and insured, as well as logistics for delivery.
It is much easier to invest in gold stocks or ETFs that hold gold stocks, physical metal, or a combination of both.
I know a reputable company called Regal Assets which helps people to invest in precious metals including gold to preserve savings for retirement. You can read the Regal Assets review here.
Remember, the best time to invest in gold will always be when you aren’t hearing about its price in the news every day.