Over this week and next, I look at gold as an investment. A quick disclaimer: this is not a recommendation to invest in gold and does not constitute financial advice; it is simply aimed at providing you with information.
Before we get into the serious business of investing in gold, here are some interesting historical and scientific facts about this most noble of metals, gleaned from various websites, including Wikipedia:
* Gold is remarkably non-reactive, and as it does not oxidise, it is most often found in its native metal state. It is also extremely malleable, so much so that it can be stretched into a string of single atoms.
* It is the earliest recorded metal used by humans, dating back at least 40 000 years. The oldest gold artefacts date back about 6 500 years.
* Gold has been used throughout history as a store of value, either directly as money or as a relative standard against which national currencies can be valued.
* About 201 300 tonnes (201.3 million kilograms) of gold existed above ground as of 2020, representing the bulk of gold ever mined. All this gold can be compressed into a cube with sides measuring roughly 21.7 metres. This volume (10 218 cubic metres) would fill just over four Olympic-sized swimming pools or a single rugby field (100m x 70m) to a depth of about 1.5 metres.
* Since the 1880s, when gold was discovered in the then Transvaal Republic, South Africa has supplied an astonishing 22% of the world’s gold. The lucrative Witwatersrand Basin, the richest deposit of gold found anywhere on Earth, forms part of the Vredefort Dome, a huge crater about 300km across caused by a meteorite impact about two billion years ago.
* South African gold production peaked in 1970, when it accounted for over two-thirds (1 000 tonnes) of the world’s annual supply of 1 480 tonnes. Although world supply is now around 3 100 tonnes (in 2022), its sources are much more diverse. China is now the world’s largest producer (330 tonnes in 2022), closely followed by Russia and Australia (320 tonnes each). South Africa’s production in 2022 was 110 tonnes, about one-ninth of its peak production half a century ago.
* The world consumption of newly mined gold is about 50% in jewellery, 40% in investments (including state coffers) and 10% in industry.
The gold price
In a 2020 article for The Conversation, “Why gold prices go up and down”, George Skiadopoulos, Professor of Finance at Queen Mary University of London, says the price of gold from 1975 can be roughly divided into four periods:
* 1975 to 2005: Interrupted only by a spike in 1979 and 1980, coinciding with the Iranian revolution, gold remained relatively steady, averaging around $400 an ounce.
* 2005 to 2011: This period saw a pronounced increase in the price – barring a drop during the 2008 global financial crisis – peaking at $1 870 in August 2011. This accompanied a global commodity boom.
* 2011 to 2018: Gold started falling, reaching a low of $1 050 in December 2015. Says Skiadopoulos: “For some, this came as no surprise because the previous period’s run-up was a bubble.” From 2016, gold began tracking a mean level of around $1 200.
* 2018 to the present: Gold has been going up again. Skiadopoulos says the increase in 2020 was part of a longer upward trend and should not be attributed only to the Covid-19 pandemic. Since the article was published, gold reached a new high of $1 970 in August 2020, dropped to around $1 650 in October last year, and then resumed its upward trajectory, breaking through the $2 000 barrier in April this year ($2 046 at the time of writing).
Skiadopoulos says whether gold will continue rising depends on various factors. “Decisions of central banks on interest rates and inflation affect the price since lower interest rates and higher inflation both make it more expensive. The same goes for exchange rates, in the sense that a weak US dollar will cause gold to rise. Then, there is supply and demand of the metal itself – gold mining is becoming more difficult over time, which is one reason for long-term increasing prices. Also important is the level of uncertainty about the future of the economy, since gold is considered a safe haven in troubled times,” he says.
But as to how each factor exactly influences gold, Skiadopoulos says the academic literature shows mixed results. He says that since the commodity boom in 2005, there has been a heated debate about whether gold, and commodities more broadly, are driven more by economic fundamentals or by the behaviour of speculators and exchange traded funds.
COMPARING PERFORMANCE
Be sceptical when presented with graphs comparing the performance of gold with the stock market (equities) over a given time frame. These graphs begin at a common base point, say 0% or US$100, on a specific date and show performance over a given period. This conveniently ignores the fact that either asset class may be undervalued or overvalued at the starting point.
Thus graphs showing the gold price versus the S&P 500 index (a convenient measure of the US stock market) look very different, depending on the time frame. Over the 20 years from 2000 to 2020, gold outperformed the S&P 500 by an astonishing 300%, but this is because stocks at the beginning of 2000 were massively overvalued in the lead up to the tech bubble crash the following year. Predictably, headlines on websites promoting gold as an investment trumpet the yellow metal’s fantastic performance this millennium.
However, if you look at gold versus the S&P 500 over 10-year and 30-year time frames, the picture is very different. Here are the three time frames to the end of 2020, compliments of the Longtermtrends website:
* 10 years: gold 34%, S&P 500 194%;
* 20 years: gold 440%, S&P 500 129%;
* 30 years: gold 276%; S&P 500 860%.
Also, don’t forget that if you’re investing in equities, it’s likely your dividends are being reinvested, which can add substantially to your long-term returns. (The S&P 500 shows only capital growth.)
PERSONAL FINANCE