Why Investors Buy Gold


Investors are increasingly anxious about the threat posed to their investment portfolios by the combination of rising inflation, heightened geo-political tension, the energy crisis, and Central Banks’ currency mismanagement. It is no wonder that more and more savvy investors are looking to buy gold bars as a hedge against uncertainty and risk.

Most investment portfolios consist of allocations to stock, bonds, and real estate. These asset classes have performed very well for investors since the global financial crash of 2008. The main driver behind their rise in value was the availability of cheap money. Central banks globally lowered interest rates and printed excessive amounts of money. This resulted in one of the longest bull markets and created what is known as the “everything bubble”, where nearly all asset markets demonstrated bubble-like characteristics.  

Lowering rates and printing money was always going to result in inflation. After an extended period of benign inflation, a confluence of ‘black swans’ in the form of a global pandemic, the invasion of Ukraine and the energy crisis, the inflation wolf eventually woke. Now central banks are struggling to figure out how to control inflation without crashing asset markets. This is likely an impossible task and is understandably, making investors very nervous.  

This environment is not good for deposits, as interest rates, although on the rise, are significantly lower than inflation, making cash deposits effectively negative yielding. Bonds which pay a fixed interest, also perform poorly in an environment with real yields (nominal yields minus inflation) close to or even below zero. And the rise in rates makes servicing mortgage debt more expensive, which naturally impacts the returns on real estate. Gold on the other hand, historically performs well when we see either; high inflation, negative real yield or heightened global geopolitical tension. Right now, we have all three of these at the same time.

But why does gold perform well against this backdrop? 

When central banks increase the amount of currency in circulation at rates greater than the growth of an economy, to much money chases too few goods & services and we get inflation. Gold is finite. The increase in the amount of gold in the world is restricted not just by nature but also by our ability to find it, mine it and refine it. Unlimited amounts of fiat currency can be created with the stroke of a pen or more often these days, a keystroke. When you have something that is finite on one hand and you measure its value by something that can be easily printed, when you print more currency, you reduce the amount of finite gold that you can purchase with that currency. i.e., the price of gold rises! 

Gold is a tangible asset that is highly liquid and portable. It can be easily valued, bought, and sold in less than 24 hours, anywhere in the world. The same cannot be said for other tangible assets like real estate.  

However, probably the greatest reason that investors buy gold is the fact it has no counterparty risk. It does not depend on anyone else for its performance. Bonds rely on government to be able to continue to manage economy and geopolitics to repay bond holders. Stocks require company management continue to perform and generate returns for shareholders. Even real estate requires the continued performance of tenants. Gold does not. It just sits their waiting in case one of these groups doesn’t do their job properly, which happens all too regularly.

What do you have in your portfolio that will protect you when (not if) that happens? 


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