Gold is a special-case commodity with a unique history and usage. Its beauty and stability have inspired humans for millennia and made it one of the first universal currencies.
While other commodities decline when industrial demand fails, gold behaves differently. It is primarily a monetary metal, a backstop currency and universal store of value.
Gold does well when real interest rates drop as investors seek to recession-proof their portfolios through safe-haven assets. Because gold does not offer a yield, lower real interest rates reduce the opportunity cost of holding gold. However, the higher interest rates are, the more an investor would ‘lose’ by holding gold instead of assets producing a yield.
Over the long term, gold has an uncertain case for investment returns. However, when the world economy shudders, gold has proved to be an effective monetary and conflict hedge.
If there is a downturn caused by geopolitical, monetary or fiscal events, the addition of gold to a portfolio will serve investors well. Gold has now effectively become a competitor currency to paper money and it will do best when rival currencies struggle.
Centuries of experience with gold shows that it has a well-defined relationship to real yields. Any future decrease in real yields, will support the hedging case for gold.
If central banks are perceived to be expanding their money supply to monetise their governments’ debt and thereby weakening their currency, gold should benefit.
In the current environment, investors should explore all defensive tools such as diversification; switching to defensive sectors; cash and put options and also look at gold.
Gold should be accessed in a responsible manner. If buying gold-mining stocks, look to engage with best-in-class firms and support advocates for initiatives to improve transparency over practices.
If buying physical gold, you should consider signing up to initiatives aimed at putting pressure on providers to source gold more responsibly. Over the long term, there may be more responsible alternatives to gold but it has admirable and possibly unique hedging properties over shorter periods of time.