When Does Gold Rise In Price & Why?
How should regular investors and people think about gold from an investment point of view?
Unlike perhaps some assets this newsletter discusses, every single reader knows what the yellow metal is and knows roughly why it is so valuable to people the world over.
Not much unites human beings both today and back through time but a love for gold might be an all too rare exception. A Roman trader or a Babylonian king or a medieval peasant wouldn't know much about modern society but offer them a gold coin or even ring as a form of payment and you would be suddenly speaking their language.
What was true then is still true today. No matter where you go, human societies are fixated on this particular precious yellow metal.
There is no better evidence for this than the fact that the price of gold has been generating a lot of news headlines lately. The reason for this all this attention isn't complicated:
The price of gold has been soaring.
The precious metal achieved the price of $2100 an ounce this past Monday.
That was an all time record and also a big psychological barrier that many interested investors had been tracking. There has been lots of analysis that starts with "if gold reaches above $2100...."
It is important to note that the price then fell sharply thereafter but most commentators expect it to resume its climb shortly. After all, that has been what it has done for most of the year.
Here is the chart:
The takeaway is self-evident: after years of being in the doldrums, suddenly the price of gold has been, post pandemic, breaking records and swinging sharply in price.
Clearly something is going on.
For that reason alone we thought we should take this chance to talk about gold. In particular, we wanted to focus on two questions:
Why its price has been rising so consistently
Why is gold still so significant in the 21st century?
Now it is true that, despite its significance, we hardly ever write about about the most precious of precious metals in this newsletter.
For better or worse, there are a few reasons for this omission:
For one, gold is a tough investment pitch for most investors. It is an asset that, unlike a bond or a stock, doesn't produce anything. It also doesn't have an industrial purpose like copper or oil or even platinum and silver.
Another reason is, similar to our argument last week about small cap stocks, there are a number of scenarios where gold does well but very FEW where it does demonstrably better than other, easier to buy and hold assets like the S&P 500 or US bond funds.
Lastly, investing in gold is not something we offer as a company, at least not directly. You can't easily invest directly in gold using the Pebble App and, that isn't just because it is difficult but also because, for most people, it probably isn't a great idea.
However, today we are going to make an exception and for a larger reason:
Gold can provide a great insight into the broader market conditions and also where investors think the market and the economy are headed.
To simplify somewhat extremely: gold typically does very well in two scenarios, both of which are in the "tails" of the statistical distribution of probabilities for the economy.
These are:
Deep recessionary environments when investors rush to gold as a safe harbor in a storm.
Occasions where inflation is heading dramatically higher where even regular people flee to gold as a store of safe value.
The first thing you notice about these two scenarios is that, obviously, the motivations are very different in each case.
In the first, people do not care that gold has no productive use, they just care that it is coveted by many humans and unlikely to plummet in price as investors flee more speculative assets.
In the second, fiat or paper currencies (the US Dollar, Euro, Yen etc.) are losing value due to the eroding power of inflation. Investors are hoping that gold will at least make up for any devaluation in your savings by rising at least the equivalent amount.
In other words, if you debase the US Dollar by 10% then an ounce of gold should rise by a commensurate amount and perhaps more on the thinking that if politicians do it once then......
But if this is when gold has done well historically does that line up with the present?
Perhaps one thing that unites both of the above scenarios is: fear. Investors are driven by fear about either a recession or losing purchasing power.
But what, exactly, are people fearful about today? Good question! To answer that we turn to.....
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