First and foremost, gold is not an income producing investment like other assets such as equities, bonds or property, that you would normally find in a standard investment portfolio.
With gold investors, it is all about the gold prices going up or down and how this fits in to your overall investment portfolio. Investors would normally use gold to help diversify and add a so called insurance policy when investment in areas such as the stock market are failing.
In U.S dollar terms, gold had a good run recently seeing gold prices continue to rise for the 4th year in a row, the gold price in general has been on the upswing.
Historically gold has held its value over time. As other equity investments fall in value, gold is usually seen as a safe-haven due to investors trying to spread risk or to diversify, especially during a recession. You also have the added fact that central banks globally are doing huge amounts of quantitative easing (printing money), which is de-valuing fiat currency. You can’t print gold, gold is limited, but you can print fiat currency.
The price of gold usually does well in times of uncertainty, whether that be financial instability, political instability or global disasters. Are many of these things happening in 2020? Well, yes.
The easy option would be to blame the current pandemic for the collapse of the stock market, which in turn, triggered more massive quantitative easing programs that are happening right at this moment (2020) by central banks around the globe. However, there is a startling amount of evidence that has been pointing towards an imminent financial collapse, whether the current pandemic happened or not.
A look back at gold through recent history.
On August 15th 1971, president Richard Nixon ended the U.S. dollar convertibility to gold.
Nixon directed the Treasury Secretary to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold.
This effectively ended the Bretton Woods system, whereby countries could settle their international accounts in dollars. Those dollars could be exchanged into gold at an exchange rate of $35 dollars per ounce redeemable by the U.S. government. The U.S. essentially was committed to backing every dollar to gold, and all other currencies around the world were pegged to the dollar. All this ended in 1971 as Nixon took away the dollar convertibility gold which in turn made all currency worldwide fiat currency.
Since 1971 in the U.S. national debt has grown substantially, average personal savings rates have declined, inflation has risen sharply, house prices have increased dramatically, average wages have not kept up with general inflation, income inequality has risen and the list goes on. Not only this, all major currencies have depreciated relative to gold, the price of oil has become more volatile, there has been more countries experiencing hyper inflation and more. (see source wtfhappenedin1971.com for stats).
Incredibly, from 1933-1974 it was actually illegal for U.S. citizens to own physical gold bullion, these restrictions were finally lifted on January 1st 1975.
With all this in mind, since the mid 70’s gold has performed well in dollar terms as the free market took over, with the price per ounce steadily moving in the upwards direction. Although there have been obvious ups and downs in the gold price, long term investors overall would have seen their gold investment naturally increase in value over time, therefore protecting their money over the years.
Recessions.
Since the 70s, there have been quite a few significant US recessions including the Oil Crisis recession 1973-75, with high oil prices, high government spending on the Vietnam war leading to stagflation and high unemployment. The Energy Crisis recession 1980 alongside high inflation, raised interest rates and a slow-down in money supply, leading to another rise in unemployment. The Gulf War recession 1990-91, the war caused another spike in the price of oil causing manufacturing trade to decline. The 9/11 recession 2001 was due to the 9/11 attack and the collapse of the dotcom bubble. The Great recession of 2007-09 (the 2008 financial crash) was all a result of the housing bubble and stock market crash.
As you can see there has been regular recessions through recent history for various reasons. However, what do they have in common?
An underlying theme of all these recessions is an expansionary monetary policy, whereby to stimulate the economy central banks buy short-term government bonds to decrease short term market interest rates. This seems to normally happen prior to a recession, usually because of government spending on conflicts, or an attempt to re-inflate the economy again after the previous recession, therefore creating huge debt bubbles which eventually pop. When the debt bubbles pop, this leads to debt deflation usually in a short period, leading to a fall in GDP and spikes in unemployment.
Oil price also seems to be a vital factor linked with recessions, with the link from oil price shooting up or down causing real economic shocks and therefore often recession follows. As you may have noticed in the news recently there has been a Russia and Saudi Oil price war even before the current pandemic pushing Oil prices lower. As of March 2020, the price of Oil has dropped per barrel considerably, even going negative on the 20th April. That means some in the Oil industry are actually paying for the Oil to be taken away! If the price of the barrel itself is more than the price of the Oil in it, you know there is trouble ahead.
Any Oil producing country has now lost a huge amount of Tax revenue, which has major economic affects including increased Taxation in other areas, more quantitative easing, and can lead to more concerning outcomes such as civil unrest and even war.
Quantitative Easing (QE).
Since the financial crash of 2008, the FED and central banks across the globe have introduced vast amounts of quantitative easing, a monetary policy whereby central banks buy government bonds and other financial assets in order to inject money into the economy. This was supposed to be a temporary measure. However, just like in 1971 when the dollar convertibility to gold was supposed to be temporary, it appears that temporary government and central bank policy seems to mean ‘permanent’.
QE never stopped. In November 2008 the FED started buying up financial assets totalling $600billion.
By March 2009 it held $1.75trillion and peaked at $2.1trillion. In November 2010 the FED announced another round of QE, buying $600billion of Treasury securities. QE3 was then introduced when the FED announced a new $40billion a month open-ended bond purchasing programme. By December 2012 this was increased to 85billion per month. Purchases were halted in October 2014 by then accumulating $4.5trillion in assets, (source Wikipedia). Ongoing QE programmes into 2020 is now pushing the FED balance sheet over $6trillion.
Don’t forget that investment funds, pension funds, and the global financial system depends on the stock market and bond market. Can the FED prop up the market forever?
With all this QE and market manipulation, the stock market at an all-time high before the current pandemic, all signals were leading towards every bubble going ‘pop’ very soon!
If you look back at the last financial crisis of 2008, then the price of gold started to rise moving into a bull market which peaked at $1896 dollars per ounce in 2011.
In 2019 there was plenty of geopolitical tension, with the USA and China trade war escalating and a general economic slowdown, pushing gold prices higher in a number of countries.
2020 has brought with it more uncertainty with the coronavirus pandemic reducing economic activity and pushing the world into recession once again.
If you look back at precious metals, specifically gold during previous recessions, note how gold has responded. Investors who diversified some of their portfolio investment into gold would have seen it as a great way to preserve their wealth and possibly even make a healthy return.
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