Exploration Hub

What's so special about gold as an investment?

April 22, 2020

Most investors follow the investments that are familliar to them; technology, transportation, cannabis. Pop culture, at least in the western world, has portrayed gold followers as rich old men, hip hop artists, and other personifications far from the regular investor:

 

But gold really is for anyone who is looking to diversify, or even hedge their investments. It is work taking the time to understand this precious metal a little better to make your own opinion of whether gold is right for you or not. Especially now, as economies around the world struggle to pin point when markets will go “back to normal”.

Here are some of the reasons why gold has been an investment option for centuries, especially in times of economic uncertainty:

1. GOLD HAS A NEGATIVE CORRELATION TO STOCK MARKETS

Gold has a negative correlation with U.S. stocks (big and small), making it one of the safest bets during market crises:

S&P Global Market Intelligence April 14th, 2020

2. GOLD’S RECESSION-PROOF NATURE

In times of extreme market stress, especially during the most recent bear markets, gold has performed superbly. Money & Markets quoted Ray Dalio last year; “In the bear market of 2000 to 2003, gold rose 27.6% while stocks fell 42.5%. That looks like a real hedge after all. During the bear market following the 2008 financial crisis, stocks fell 51% while gold rose 18.6%.”

3. GOLD IS HIGHLY LIQUID

Gold can easily be traded in global market centres, such as London and New York. This means it can easily be sold at a widely recognized price on the open market; the spot price that buyers and sellers can check at any time to determine gold’s current price.

4. GOLD HAS BEEN AROUND FOR CENTURIES

The first use of gold as money occurred around 700 B.C! How did it pass the test of time? It is highly durable, easily divisible, transportable (but heavy!), and most of all, it is scarce. Money must be all of these, to one degree or another, if it is to function as a means of ex­change.

Governments and central banks do not always trust each other, but they have trusted the historic value of gold for centuries. 

5. GOLD IS VERY RARE

As shown on the graph below; finding new significant gold discoveries (at least one million ounces of gold) has become increasingly challenging.

Many people think we may have reached “peak gold”. What does that mean? This article of INN explains; “Peak gold is the point in time where the metal has reached its highest level of production and in return it begins a terminal decline. This is to say, that if peak gold has been reached, then all major gold deposits have already been found and there is nothing left for miners to explore.”

 Once mined, where does gold end up? Only 10% of gold mining production is used in industrial demand (electronics, dentistry and other industrial uses) where it is mostly consumed and “lost” from the market.

Source: https://www.gold.org/goldhub/data/gold-supply-and-demand-statistics

 

The rest gradually piles up in the form of jewelry and bullion. Today, there are an estimated 181,000 tons of “above-ground gold” in the world, the accumulation of gold mining production back to the earliest times. This visualization from Visual Capitalist shows how much gold has been mined in history if it was piled into one solid cube:

Source: http://money.visualcapitalist.com/11-visualizations-gold-cubes/

 

And this is how much gold is produced per year:

Source: http://money.visualcapitalist.com/11-visualizations-gold-cubes/

 

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