The recent surge in gold prices, breaking the $2,100 mark, has fueled discussions about the precious metal’s potential as an investment. However, experts caution that while the allure of gold is undeniable, investors should tread carefully, as navigating the gold market demands impeccable market timing.
Gold’s recent ascent, with an 11.7% climb since early October to an early December intraday record, has been attributed to various factors, including geopolitical tensions, the looming 2024 elections, and falling interest rates. The latter, in particular, has positioned gold as a perceived “safe haven” in a low-yield environment.
Before succumbing to the gold fever, it is essential to understand gold’s unique characteristics. Unlike stocks, gold lacks earnings, adaptability, or dividends. While its year-to-date return of 11.9% may sound impressive, it’s crucial to note that this surge has occurred within just two months.
A historical perspective reveals that, from 1974 to 2022, gold has annualized at a modest 5.0%, significantly lagging behind global stocks, which doubled that figure at 10.5%, and US stocks, boasting an annualized return of 11.9%. Even US 10-year Treasuries managed a total annualized return of 6.7% during the same period.
Moreover, gold’s supposed “stability” is debunked by its 1-year standard deviation, a measure of return volatility. With a standard deviation of 19.0%, gold proves to be highly unstable, surpassing world stocks’ 15.0%. This volatility underscores the importance of timing when considering gold investments.
The recent surge in gold prices above $2,100 serves as a stark reminder of gold’s boom-and-bust nature. Despite hitting a peak in August 2020, it took 40 months for gold to return to a flat position. In comparison, US stocks outperformed, demonstrating a gain of over 48% during the same period.
Longer-term trends reveal gold’s roller-coaster journey. After peaking in January 1980 at $850, it took until January 2008 for gold to reclaim that level—28 years later. Even the 2011 peak at $1,895, driven by Europe’s debt crisis, was followed by a 45% drop through 2015.
Gold’s returns have proven positive in only 58% of all rolling 12-month periods since 1974, emphasizing the unpredictable nature of its performance. In contrast, US stocks demonstrated positive returns in 80% of such periods, showcasing the more reliable nature of equities.
The motivations behind investing in gold are varied, with some seeing it as a hedge against inflation or market downturns. However, 2022 challenges these assumptions, as gold’s performance did not align with these traditional expectations. Inflation, averaging 9.5% year-on-year during gold’s slide, did not serve as a hedge.
Furthermore, the belief that falling interest rates drive gold prices higher is questioned. Central bankers’ unpredictable decisions and the lack of a strong negative price correlation between falling long rates and gold undermine this notion.
Gold stocks, while potentially offering dividends and the benefits of capitalism, exhibit higher volatility than broader markets. They tend to rise in early equity bull markets and behave akin to small value stocks, adding an additional layer of complexity to gold investments.
In conclusion, while gold’s recent rally may be enticing, investors must approach this precious metal with caution, recognizing its historical volatility and the necessity for astute market timing. The gold market, much like a maze, requires careful navigation to avoid pitfalls and make informed investment decisions.
