Browse Tag by Ray Dalio
Opinion, Timeless Musings

Gold Rush

One big question on everyone’s mind is should I go for Gold now? Has it run up too much? While everyone seeks for an answer we should ponder on the following thoughts:-

1)Historically during turbulent times when taps of money open how did the yellow metal perform?

2) Is the recession time to dig gold?

3)What dictates Gold prices Globally?

4)How does this commodity behave Vs other avenues?

5)Should we look at gold from a long term perspective what are various views?

The History of Gold:-

If we go back to the date when they started keeping records gold has always fascinated mankind whether it be stories narrated to kids or legends of lost treasure to the sea chased by voyager and pirates or the ultimate Gold Rush days when folks turned miners gave their lives for that elusive find which would catapult them to fame fortune and glory.    

If we look at the chart below we see how has the gold bullion performed Vs other asset classes like Treasury bills and cash.

YTD performance of Gold Vs other asset classes

We went 40 plus years back in time to see how does it has behaved over the years. We realized that whenever there was either period of high/hyperinflation or war-like situations have led to surge in Gold prices and during periods of economic stability the yellow metal also loses it sheen.

Historic performance of Gold

Is the recession time to dig gold?

The late ’70s saw a massive spurt in the demand on account of geopolitical tensions like the Russian invasion of Afghanistan, the political instability of Iran also accompanied by a period in the United States which had seen inflation rising to 13%. This was the classic stagflation era( Inflation accompanied by subdued growth). Mid 80’s was the era when we saw the emergence of the Uber class wall street bankers who made it big by leveraged buyouts and corporate raids and firms like KKR made it big in these times sadly this period ended with a burst of a bubble and again Gold shined then. We saw another rally post 9/11 and internet boom which lasted for a good part of a decade. Again now we see a spurt in prices.

So when Should we buy gold?

Simple question simple answer when the big guns chase it.

It’s interesting to note all the periods in which Gold did well either there were high inflation times or periods in which money taps opened by central banks( adoption of a loose monetary policy ), surprisingly central banks also tend to become buyers of the bullion. That can be considered as a loose indicator when to buy Gold.

A very interesting trend is that the Russians and the Chinese have been adding gold.  Historically the COVID hit nations of Germany and Italy have few of the highest Gold to Forex reserves.

Chinese and the Russians have been rushing for Gold

The above stat shows the European economies have believed a lot in Gold 

What is driving the prices and what are the trends?

 The data below clearly shows that the real or physical demand for Gold is on fall, maybe it has many reasons, mostly lockdowns across the globe can also be a cause. But the overall trend of paper gold as an investment avenue is on the rise. 

What do top investors think:-

Warren Buffet & Charlie Munger:-  The commodity doesn’t produce any rent, dividend, interest, or cash flows, it can just sit pretty neither does it grow in size on its own. Hence it may not be a prudent investment that they like.

Ray Dalio:-  Ever since the Breton wood system was abolished and we could print as many dollar bills and money became insanely cheap where almost 15plus trillion dollars of debt is in negative interest rate regime, gold is a better proxy to cash and should be held during uncertain times.

What should a rational investor do?

It is always advisable to have 5-10% exposure to the yellow metal as a part of asset allocation, just on grounds, it has a negative correlation to equities and can help portfolios hold ground in uncertain times.

Sources and references:-

1. https://www.rbi.org.in/home.aspx ( Reserve Bank of India)

2. https://www.gold.org/ ( World Gold Council)