The 2020 Gold Rush is Here— Are You Missing Out?

Precious metals and alloys have been the bedrock of economies for over four centuries.

Gold’s particular rarity and arresting appearance have made it a devilish character throughout our human history. That scarcity also made it a reliable “store of value” when prices of other assets wildly fluctuated—perfect for budding economies.

It was like that for most of human history, all the way until 1971, when the US finally abandoned the gold standard. It was then that the price of gold spiked as it became a viable investment option. But the price, thereafter, remained relatively sluggish as more shareholders used it to dull the effects of market volatility.

Fast forward to 2008, after the housing market toppled, its price jumped. Then, in 2020, it rocketed. Again, that “store of value” during economic turmoil comes into play.

As of this August 10th writing, the price of gold has exceeded $2,000 for the first time ever. It rose over 4% last week alone, and it is on course for its ninth week of gains in a row—its best record since 06’.

In other words, gold is the best performing traditional asset in the world.

And this 2020 goldrush has investors speculating. To paraphrase, “What in tarnation is going on here? Is it just timid investors fortifying their portfolio? Is gold’s rising price an indication of the depreciation of the US dollar? Do I need a little Au in my allocation?”

While it is true that worried investors are looking to hedge risk in an unprecedented time, it is not the only reason the price of gold continues to climb.

According to a recent CNBC article, economists say, “…the rally in gold was being driven by central banks’ monetary easing, which had resulted in negative real yields” And furthermore, “This has reduced the ‘opportunity cost of holding a zero-coupon asset such as gold.’” 

The Federal Reserve announced a $700B quantitative easing program back in March, as a response to the COVID-19 pandemic. And gold has mostly soared since. In 2008, similarly, banks quantitatively eased with 4 trillion (that is with a “t”) dollars. Gold’s price then also surged (peaking at $1,900).

To explain quantitative easing, it means that a central bank purchases longer term securities to increase the money supply, encouraging lending and investment. In essence, increasing the supply of money lowers the cost of money, thus interest rates become lowered, making the terms for lending much easier. But it also can devalue currency (happening now) [5].

All of that aside, the real question is (and, no doubt, the only reason you are reading this article): do I need to buy a straw hat and pickaxe and hightail it to California; is gold a good investment? By “good” we mean “offering long-term returns and stability.” It can also mean “better than bonds.”

Here’s our take.

According to a NY Times article, the inflation-adjusted price of gold has risen on average by 1.1% a year for the last 100 years (which is not exactly a fair assessment since we’ve only been off the gold standard for 50 of those years. Plus, the Gold Reserve Act in the 30s took all gold titles away from private investors altogether). In any case, that’s still an unimpressive long-term yield. But the timeframe does matter.

For instance, over 30 years, stocks and bonds outperform gold—but over 15 years gold beats stocks and bonds. It can be argued that over a long period, stocks and bonds are better, over short, gold is better. Gold has also been a rock to stand on during market crashes with a peak in price in the following years: In 1980 at $850 and 2008 at $1,900—2020 has yet to play out.

But even as a way to hedge risk, bonds still outshine gold in many ways. The fact of the matter is, at the end of the day, treasury bonds are inflation protected, they aren’t as volatile, and they have a historically better long-term record.

In the wake of this goldrush, many investors are tempted to drop everything, buy a gold pan and move to the west coast in search of striking it rich. But if we learned anything from the 49’ goldrush, it is that it does not last. And, for investors, the one thing they need their money to do is to last them.

So while, yes, it has been a reliable mode of stability, it has not had a great long term yield. Now, we at AssetBuilder do not believe in speculating the market, but this is definitely shaping up to be a year for gold—for now.