Gold is a bargain

The price of gold has fallen by 11.2% since 22 January to just under $1,200 an ounce – that’s more than 35% below its peak of $1,900 in 2011. Now may prove a good time to top up your holdings.

915_MW_P07_Markets

Gold has bought a good suit for 100 years8

Daniel Stein

Gold has a bad reputation among some investors. The shiny metal has long been seen as "the investment choice of the cranky and the fearful", says Andrew Bary in Barron's. It yields nothing, and in the words of Warren Buffett, it just "looks at you". It has certainly fallen out of favour this year. The price has fallen by 11.2% since 22 January to just under $1,200 an ounce that's more than 35% below its peak of $1,900 in 2011.

As a result, however, gold looks "inexpensive". This may prove a good time to top up your holdings in this out-of-favour asset class. Investors should hold 5%-10% of their portfolio in gold.

Hedge against higher prices

For one thing, inflation is beginning to pick up around the world. The yellow metal has served as hedge against inflation eroding the value of stocks and bonds. "Gold was $20.67 an ounce 100 years ago and that bought a good men's suit," as Bary points out. "At $1,200 an ounce, the same is true today."

It has also done well in times of crisis used as a safe haven for centuries, it's an asset that tends to thrive on bad news. Gold rallied by 17% in the six months after Lehman Brothers collapsed a time period when the S&P 500 fell by more than 40%.

Gold is rare all the gold mined in the world would fit into two Olympic-sized swimming pools and that makes it valuable. Annual new mined supply adds less than 2% to the global total, so it's not easy to boost supplies of gold quickly. With paper money, on the other hand, the printing presses can produce more in minutes. That's why "people have historically viewed [gold] as a hedge against government depreciation of local currency", Keith Trauner of the GoodHaven fund management group told Barron's.

Cryptocurrencies have been touted as an alternative to gold, as it is also expensive to mine more of them. But bitcoin, which dropped 55% this year, remains highly volatile, and it's still very difficult to trade. According to some, meanwhile, gold's role in protecting against inflation may have been overstated. "If you strip out the 1970s, you find the relationship between gold and inflation is quite weak," Brian Lucey, professor of international finance at Trinity College Dublin, told Reuters.

"That is because you have a very different inflation regime in the late 1980s and 1990s than you had in the 1970s." Back then, double-digit inflation was the norm. "We're not going back to that."

But prices are set to rise as labour markets tighten, and central banks are poor at containing inflation. There are also still plenty of investors scarred by the 1970s, which bodes well for demand. This week's big gold merger (see page 9) should also spur interest. Time to stock up.

Recommended

The charts that matter: the US dollar keeps on strengthening
Economy

The charts that matter: the US dollar keeps on strengthening

The US dollar saw further rises this week as gold and cryptocurrencies sold off. Here’s how that has affected the charts that matter most to the globa…
27 Nov 2021
Now might be a good time to stock up on platinum – while nobody cares about it
Silver and other precious metals

Now might be a good time to stock up on platinum – while nobody cares about it

Platinum has disappointed investors more than any other commodity in the last five years. But its day will come, says Dominic Frisby. Stock up now whi…
25 Nov 2021
The charts that matter: gold hangs on to gains while the dollar continues higher
Economy

The charts that matter: gold hangs on to gains while the dollar continues higher

The gold price continued to hang on to last week’s gains, even as the US dollar powered higher this week. Here’s how that has affected the charts that…
20 Nov 2021
The climate summit didn’t kill off coal – what stocks might benefit?
Coal

The climate summit didn’t kill off coal – what stocks might benefit?

The COP26 climate summit made a commitment to "phase down" coal. But coal still accounts for a vast amount of the energy produced around the world – a…
19 Nov 2021

Most Popular

Don’t worry about the global population explosion – it’s unlikely to happen
Investment strategy

Don’t worry about the global population explosion – it’s unlikely to happen

One of the many things we are taught to worry about is the fast-rising global population. But in fact, says Merryn Somerset Webb, the opposite is tru…
15 Nov 2021
Four of the best new investment trust listings
Investment trusts

Four of the best new investment trust listings

Diversify your portfolio and benefit from rising dividends with these four new investment trusts coming to the market soon.
15 Nov 2021
Is it time to remortgage your home?
Mortgages

Is it time to remortgage your home?

Banks are already starting to prepare for higher interest rates, says Alex Rankine. Should you, too?
23 Nov 2021