A Golden Future: Visualizing The Economic Case for The Barbarous Relic
The comments below are an edited and abridged synopsis of an article by Tyler Durden
Throughout history, gold has been a sign of wealth and a store of value. Today, gold is not only a precious metal but also a precious investment. In 2020, 47% of global gold demand—the largest share—came from investors.
Gold can protect investors’ wealth during tough times while preserving capital for the long run. Investors add gold to their portfolios because it offers many investment benefits: Effective diversification; long term returns; and a hedge against inflation.
Additionally, gold’s low correlation with other assets allows it to outperform during recessionary periods, reducing the downside of stock market downturns. In fact, gold delivered positive returns during the recessions in 2001 and 2008, while the S&P 500 went negative.
Amid the economic turbulence of 2020, investors turned to gold once again, with record inflows in gold ETFs. And in turn, gold generated a 25% annual return.
With a rapidly rising money supply and near-zero interest rates in response to the Covid-19 recession, the world is entering an era of more QE, and possibly higher inflation.
This could create the perfect storm for gold for three reasons: Gold has historically performed well during periods of high inflation (greater than 3%), with an average annual return of 15.4%; gold has historically tracked the growth in the global stock of M2 money supply; low interest rates reduce the cost of holding gold. Therefore, it often outperforms when real interest rates fall.
The economic case for gold is built on its ability to protect investors in downturns and volatile times while preserving wealth for the long term.
Gold will always hold its value, as a precious metal and a precious investment.