Gold is the Best-Performer of the Past Two Decades

While equities tend to dominate the headlines, it has been the star performer of the past two decades. Gold has outperformed both the Down Jone sand the US Dollar since 2001. Gold is up 498% compared to the Dow up 98% and the dollar down 81%. Gold is the quiet achiever!!

From a short-term perspective, gold’s safe-haven reputation has been tarnished in the eyes of some, with prices tumbling as investors sought to free up cash amid a broad and devastating market rout. But this is exactly what took place in the immediate aftermath of the GFC in 2008, right before gold started a years-long rally that culminated in the 2011 price record still in place today.

Another similarity with 2008 is that, while gold has fallen in recent weeks, the drop has been far outpaced by declines in equity markets and other commodities, so its relative purchasing power has risen.

“When I think about what would I buy in the right here and now, I would be buying gold,” Wayne Gordon, executive director for commodities and foreign exchange at UBS Group AG’s wealth-management unit, told Bloomberg TV. Prices would appreciate over three to six months, according to Gordon.

Some investors have been forced to sell gold to raise cash. A similar pattern -- losses at times of extreme market stress -- was seen in bullion at the onset of the global financial crisis in late 2008, before it went on to peak in 2011.

Gold “provided what it should during times of crisis, a form of insurance to cash in when liquidity was required,” Peter Grosskopf, chief executive officer at Sprott Inc., said in a note, referring to recent moves. It’s one of the first assets to be cashed in when leverage is reduced, and long-term investors not subject to margin pressures will be rewarded owning gold at this time, he said.

Separately, some commentators have been asking if gold is the great safe-haven that it’s made out to be, then why have we seen the price falls that we’ve witnessed recently?

We recently saw gold surging and challenging the $1,700 per ounce price level for the first time since December 2012. A remarkable achievement when everything around it was collapsing due to coronavirus fears.

Gold at $1,620 per ounce is still up $305/oz – or 23% - on where it was this same time last year. Meanwhile equity markets have typically fallen by between 20% and 30%.

This is not a bad outcome for an asset that according to some has reportedly lost its safe-haven lustre!

Why Sell Gold?

In this extremely volatile market environment, no investment is immune from a sell-off or profit-taking, not even gold. And let’s not forget that one of the major reasons as to why investors hold gold is that it is an insurance policy -which can be called upon or liquidated - all or in part – as required in times of crisis.

Margin calls elsewhere in the market dictate that financial assets need to be sold. Inevitably therefore, when investors have already liquidated part or all of their equity holdings that have fallen at a much faster rate, they will then look to liquidate portions of their gold holdings.

It can therefore be argued that gold is fulfilling its role as a safe haven - and yet is still well up on where it was a year ago. This tells us that gold’s fundamentals remain overwhelmingly positive and any near-term price corrections aren’t significant in terms of the bigger picture.

A Strong 20-Year Trend

While gold recently came close to touching the $1700 per ounce mark – it’s highest level in seven years – from a bigger picture perspective it is a reflection of a much broader gold price run that began back at the turn of this millennium. The bull market in gold began in the early 2000s, not long after many of the world’s central banks (including Britain and Australia) had sold much of their gold reserves below $300 per ounce.

Outstanding Outlook

Gold has survived as a means of exchange for thousands of years, and that is likely to continue. Central banks will pour liquidity into the system, which will weigh on the value of currencies. While gold is likely to experience downdrafts, price weakness could be a golden buying opportunity for the yellow metal. The current environment favors higher gold prices and a new record peak in dollar terms.