The first meeting that I ever had with a fund manager, was with a chap who managed a gold fund. Not only did his strategy invest in the physical stuff, but also in gold mining stocks.
Perhaps unsurprisingly, he was quite keen on gold.
And to be fair, he had had a couple of great years. This was the summer of 2011, and the gold price had been on a tear off the back of the Global Financial Crisis.
From August 2008 to August 2011, the gold price almost doubled.
Source: Yahoo Finance
At this point I wasn’t yet the cynical sod I am today.
Hearing this, very intelligent fund manager, put forward the case for gold - I was all in. If I’d had any money, I would have been loading up.
That, would have been a mistake. Summer 2011 was almost the peak for the gold price which went nowhere for a long time after that.
Source: Yahoo Finance
There are a couple of lessons here.
One, everyone's selling something. Two, it is very easy to construct a positive case for something when the price has just gone up in a straight line.
It is important to remember that gold doesn’t generate cashflow of any kind. No earnings, no dividends, no interest.
And that means that the price only goes up when people think that the price is going higher, which increases demand relative to a (generally) stable supply.
How do you get people all jazzed up about something? You tell them a story.
Narratives exist around every single investment on the planet, but they are especially important when it comes to an asset like gold.
The reason that gold bugs are so vocal on social media, evangelical even, is because they have to be. There’s no fundamentals for it to trade on.
Source: Yahoo Finance
Although it’s been a minute, gold is back at an all-time high price. You might have heard the adverts on the radio declaring as much.
And as surely as night follows day, there are lots of perfectly logical explanations out there as to why it is going to go higher still.
If the last interest rate rise of the cycle is in the books, then that should provide support to the gold price. When interest rates are rising, the opportunity cost of holding a lump of yellow metal that doesn’t produce any income is also rising. If interest rates are now going to start falling, then that lump of gold begins to look more attractive.
Central banks have been printing money like it is going out of fashion since the Financial Crisis to stimulate economic growth. It is likely that the response to the next slowdown will be similar. Gold bulls would point to its constrained supply as evidence that it is a superior store of wealth than standard currency. It is a common refrain amongst these folks that an ounce of the yellow stuff has always, and will always, be enough to purchase a “fine gentleman’s suit”.
Central banks are also buying gold at record rates, mainly at the expense of government bonds.
Source: World Gold Council, Incrementum AG
4. The world is currently a pretty terrifying place, and gold has historically provided a “safe haven” during times of strife.
Because gold has done well in the past during periods where it feels like the world is collapsing, we find that a lot of shilling for gold is served with a side-dish of doomsday mongering.
Maybe this is my own bias coming into play here, but I just can’t get on board with a mindset that sees a crisis around every corner.
I generally believe that the world will be a better place in the future, not because bad things won’t happen - they absolutely will, but because human beings have established an incredible track record of learning from these events, and adapting to improve things moving forwards.
People thought it would take years to find a COVID vaccine. It took months.
Anyway, I digress.
I don’t think anyone can say with a straight face that an asset like gold, which has acted as a store of value for hundreds, if not thousands of years, isn’t a proper asset class.
But just because something is an asset class, doesn’t mean that you should be investing in it.
I have absolutely no idea whether buying gold here is a good idea or not. None. Just in the same way that I have no idea whether you are going to make money in crypto/whiskey/Pokémon cards (delete as appropriate).
The key here, for me, is causality. I can say, with great confidence, that when I put my own money into global equities that that investment will appreciate in value over sensible timeframes.
This is because those companies, in aggregate, will grow their earnings over time, increase their share prices and return money to shareholders. Over time the valuation that investors ascribe to corporate earnings will naturally swing around and sometimes it will go down. But over the long term those earnings, they will only ever trend upwards.
In a similar vein, when I invest in bonds or property or even cash I can see where the returns are coming from because I can see the cashflows.
Because gold doesn’t generate any income, it’s naturally difficult to establish a sensible valuation for the asset.
Therefore buying gold with the hope of selling at a higher price down the line can be like playing poker without looking at your cards. There’s a word for that, and it isn’t investing.
Although it can be difficult to remember sometimes, we don’t need to have an opinion on every investment opportunity under the sun. We don’t need to play at every ball that we are bowled.
History tells us that we don’t need to.
Source: Dimensional. Returns for the global stock market are shown using the MSCI World Index, and returns for both assets are shown in GBP.
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