Why Gold Investing Wins the 21st Century So Far
Thursday, 12/19/2024 11:10
3 key factors why gold beat stocks, bonds, silver...
The PAST is no guide to the future, or so financial regulators and other investment spoilsports want you to think,
writes Adrian Ash at BullionVault.
But lucky for gold, it's true. At least across the past 25 years.
Hated and dumped back on New Year's Eve 1999, a lump of
the barbarous relic is by far the best-performing asset of the 21st Century to date.
What changed to make this happen?
Lots of things. If not all of them.
But time is tight, and besides, some things count more than others. The really important stuff might matter to whether you invest in gold over the next 25 years, as well.
So gun to your head, how about we pick three points that stand out?
That's what I asked Matt Turner of Anglo American and Suki Cooper of Standard Chartered at
the LBMA's pre-dinner seminars this Christmas.
#1 Gold Driver No.1: Central banks
Net-net as a group, central banks just can't get enough of the stuff today. Yet New Year's Eve 1999 found gold bullion loathed by central bankers like never before.
A century earlier, these same bureaucrats had decided that gold was the be-all and end-all of monetary assets. But the warfare-and-welfare boom of the 20th Century put a stop to that. Element 79 just didn't fit.
Gold vanished from hand-to-hand money in the 1930s, it vanished from backing most countries' money by the 1950s, and it was
finally cut from backing the United States' almighty post-war Dollar (and therefore from the rest of the world's money) in the early 1970s.
A quarter-century later, that left very few central bankers with a memory of gold as a monetary asset, let alone a love for it.
So as the Millennium drew near, European and other Western nations were selling gold, while Asian and other 'emerging' nations were too busy fighting currency-and-debt crises of their own to spare any cash on what no one else wanted.
But this marked an extreme, not a new normal. And starting from there...
...and after
the gold price finally found a floor and turned higher in the early 2000s...
...global selling flipped into strong net demand from central banks when the 'global' financial crisis hit Western economies.
Why? No one sells safe-haven gold during a crisis (not
outside the ultimate crisis). So Western central banks stopped dumping it.
Just as importantly, the GFC saw interest rates on Dollars, Euros, Yen and Sterling collapse...
...down to zero and even below it.
That forced emerging nations (who now had much bigger reserve-asset stockpiles to defend thanks to globalization sending them huge piles of Western currency to pay for huge piles of energy and cut-price manufactured goods) to spread their risk with a better store of value than the big reserve currencies now offered.
Result? The strongest run of central-bank gold buying since the height of the interwar Gold Standard rush, plus the highest gold prices in history.
Okay, okay. But what else is the No.1 reason for gold's big 21st Century bull market?
#1 Gold Driver No.2: Gold ETFs
The boom in investment access to gold can't be understated.
It was 20 years ago last month that the giant GLD
gold ETF was launched onto the New York stock market.
The GLD still accounts for a quarter of total gold ETF holdings worldwide, albeit down from 2/3rds during the global financial crisis. And back in 2004, it enabled US investors to do what a couple of trusts already let Aussie and UK investors do:
Track the price of gold without owning the metal.
Yes, gold ETFs are backed by gold to give their stock-market shares value. And that link meant that, pretty soon, the quantity of gold held to back ETFs also tracked the price. Or vice versa.
Either way, ETF demand has
shown a strong and clear connection with the direction of bullion.
Tangible assets are something which US fund managers in particular can't bear, because they can usually hold only securitized investments in their portfolios, not physical stuff.
Prior to the ETFs, that meant big money either had to buy gold futures or options contracts...
...buying leveraged risk and paying costly derivatives fees to get gold-price exposure...
...or they had to buy gold mining shares, which are NOT the metal but carry management, equity, political and a host of other risks instead.
So it was – ironically – the same rush of innovation which gave the early 2000s
such toxic assets as subprime mortgage CDS and the lethal CDO-squared that gave investors wanting a hedge for all that risk the chance to trade a gold-backed ETF...
...a stock-market quoted, gold-denominated debt security which is the obligation of a trust created for the specific purpose of enabling gold investment through it.
Got all that? Simple folk wanting simple ownership might prefer simpler access. And they also got new gold products in the early 21st Century too.
Yes, market-leader BullionVault, of course...
...now used by over 110,000 people worldwide to invest directly in physical precious metals, and now caring for $5 billion of precious metals for those users today.
There was also a rash of new coin shops and e-tailers, all rushing to fill the gap which old-school dealers (including your local bank branch) had vacated during gold's long bear market between its 1980 top and the year 2000.
But for the big money, especially money that didn't care so much about owning any gold, it was ETFs which revolutionized how fund managers could get into the metal. And that access soon meant the size of ETFs showed a remarkable link with the price of bullion.
Between 2004 and 2022 in fact, their 12-month correlation averaged +0.84...
...a number which would read +1.00 if they moved exactly in lockstep, or -1.00 if they moved exactly opposite.
But as our chart shows, this strong relationship between gold prices and gold ETFs broke down around Russia’s invasion of Ukraine...
...because while Western sanctions against Moscow drove central banks to seek yet more safety in gold, helping support and raise prices, Western money managers just didn’t feel the fear, cutting their holdings and taking profit instead (as did
private bullion investors on Russia's all-out invasion too.)
This break between ETF flows and gold prices then continued as China’s miserable real-estate and stock-market performance spurred a surge of private Chinese demand this spring.
More on that another day. Because China really matters. So does India.
For now, let's not forget what brings our first two Number 1 gold-price drivers together.
#1 Gold Driver No.3: Fear and loathing
The DotCom Crash, 9/11, Iraq's WMDs, Katrina, 7/7, subprime, Northern Rock, Lehmans, the Mumbai attacks, Eurozone crisis...
...the first decade of the 21st Century pulled the rug from under public confidence in both government and markets.
Doubt and fear then only deepened during the Covid pandemic, the following surge of inflation, Russia's invasion of Ukraine, Hamas' attack on Israel, the flattening of Gaza, Russia 'testing' nuclear-capable missiles, and the ever-growing warnings about how Western government debts (and therefore spending) are simply unsustainable.
Instead of enjoying '
the end of history', the world has been living through what can feel more like '
the end times'. Which is ironic, given the contrast between
the giant parties thrown to mark what was popularly known as the Millennium and
the 'millennial' end-of-the-world seen in some biblical readings.
Either way, risks unseen and unknown have come to threaten everyone's savings and safety, no matter how cautious.
Maybe a lump of uninflatable, indestructible, undefaultable value would help?
It has certainly worked out that way for gold so far this century.
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