Gold has been the best-performing asset class this year. Investor and columnist Ruchir Sharma writes in The New York Times opinion section about gold and why it is being bought right now.
Gold enthusiasts, or investors who believe in the continuous rise of gold prices, have long been regarded as the paranoid fringe of the financial world, clinging to their shiny asset to protect themselves from the ever-looming destruction. However, recently it seems that gold enthusiasts have something going on. Gold has been the best-performing traditional asset class in the world this year. Its price recently surpassed $2000 per ounce for the first time. Now, everyone from serious investors to wet-behind-the-ears day traders seems to be talking about the excellence of gold.
A recent survey of 1,000 people found that one in six Americans purchased gold or other precious metals in the past three months, and about one in four seriously considered buying. On the popular Robinhood trading platform, the number of owners of the two largest gold ETFs tripled since January.
It seems that we have all become gold enthusiasts.
It is tempting to define the appeal of gold as based on a desire to find a safe haven during the pandemic – a kind of economic panic reaction that fades as the crisis recedes. However, the mania for gold is also reinforced by a sense that the easy money hoarded by central banks and government stimulus programs could contribute to inflation, making the gold craze a more concerning economic omen.
Serious-minded investors have previously downplayed gold as an asset class that simply exists and does not yield interest. In many ways, gold is like oil or iron ore or other commodities that are extracted from the ground. The prices of most commodities rise and fall seasonally and do not increase in value over time.
As a loyal stable value keeper in times of uncertainty, gold has performed better than other commodities, but as an investment, it has not been dynamic. Over the past century, the inflation-adjusted price of gold has risen on average by only 1.1% per year compared to American stocks, which increased by 6.5%. Even a 10-year U.S. Treasury bond, considered the safest asset class in the world, has yielded better returns on an annual basis.
Gold has primarily shone during tough times. Its value rose during the stagflation of the 1970s, when it even increased sevenfold, reaching a peak of $850 by the early 1980s. The surge in gold prices was seen again after the global financial crisis in 2008, with the price reaching a high of $1900 in 2011, after which it slid downwards for the following decade.
When the Fed indicated it would abandon its plans to raise interest rates in 2019, gold began a new bull market. The price of gold has historically been at its highest when interest rates fall below the level of inflation. When inflation-adjusted returns on bonds turn negative, investors feel safe owning gold as a store of value, even though it does not yield anything.
This has been ongoing over the past few months. With bond yields near zero in the USA and negative in Europe and Japan, investors have driven the price of gold up by 30% in addition to last year's 20% increase. In recent weeks, rising inflation expectations due to government economic stimulus have added further momentum to the rise.
Additionally, with stock value expectations significantly above long-term averages, gold appears relatively cheap. And with central banks printing money, some see gold as a stable alternative to the dollar and other major currencies. (Gold also pulls up its less glamorous relative, silver, which is rising from an unusually low level, as people view silver as a cheaper opportunity to tap into the same trends.)
For gold to rise further, inflation expectations must increase. High inflation expectations have largely been losing bets over the past four decades, but the probability currently looks better. Most nations are ramping up their stimulus to record levels at the same time that counterforces like globalization, which have kept inflation in check, are weakening. Typically, when inflation threatens, central banks are relied upon to raise their interest rates, but Fed officials have indicated that they are not "thinking about thinking about raising rates" and do not expect to move in that direction before 2022.
This is not a healthy situation. When interest rates are this low, money is practically free, which raises the value of socially worthless asset classes higher than what the seller can expect to receive for them. Gold is one such example. The broader risk is that such purely financial speculation undermines the economy by pulling capital away from industries that would use it more productively.
Investing in gold has none of the admirable qualities I look for, such as innovation or dynamism, and it has many vices that I dislike, such as the typical rental yield mindset of the mining industry. But we are not living in normal times. Unless a vaccine appears soon, unless central banks stop frantically printing money, and real interest rates start to rise again, it is hard not to be a gold enthusiast right now.
Ruchir Sharma is the chief strategist and author at Morgan Stanley Investment Management, as well as an Opinion columnist. This column reflects his personal opinions.
This text is a direct translation from the original article, which was published on The New York Times website on August 8, 2020.
