How has gold performed against other asset classes over 10/20/50 years.
Over the long term, gold has outperformed other key asset classes
Since the gold standard was abolished, gold has performed on par with Commodities and US Equities. Over 20 years, Gold significantly outperformed US Stocks, as gold prices soared on the back of the global financial crisis.
Where will gold prices be in 2030? [New Title] [~800 Words]
There are strong macroeconomic forces which could see Gold prices appreciate significantly over the next 10 years.
1. Gold protects against unexpected rise in inflation
Post-covid, the world economy has rebounded strongly with particularly strong growth in the USA, China, and resiliency in SouthEast Asia. Surging demand has seenHeadline inflation grow to 5.0%, led by a sharp rise in commodity prices. Additionally, producers have faced increased prices due to tight labour market conditions.
If inflationary pressures go out of control, gold stands to benefit greatly. Gold prices tend to keep pace with inflation.
As of 2021, governments seem satisfied that inflationary pressure is temporary, and can be contained by prudent macroeconomic policy. But if inflation increases sharply, Gold stands to benefit greatly, as the price of real assets appreciate correspondingly
2. Gold protects thrives in low interest rate environment, quantitative easing and excessive money printing
Gold is a beneficiary of low interest rates and increased money printing – policy options that governments, particularly in the US and other developed countries, look destined to pursue.
The Fed has once again dropped the federal funds rate to at/near 0%. Low interest rates are generally good for gold. SInce gold produces no yield, high interest rates create a higher opportunity cost for holding gold. Low or near-zero interest rates reduce the relative cost of holding gold.
In addition, the fed has continued to print money, doubling the size of its balance sheet from ~$3.5T USD to nearly $7T USD. Increasing the supply of money should also result in a corresponding price increase in real assets (more money chasing the same quantity of gold tends to cause gold’s price to go up) .
Governments across the world seem to have fewer policy options. To respond to the pandemic, governments were forced to take on increasing debt. Any increase in interest rates could result in higher interest payments, which tends to lower growth.
This echoes the response of governments and central banks during the global financial crisis in 2007, where the fed first introduced the policy of quantitative easing. Short term interest rates were pinned to zero (or near-zero), whilst the fed injected money into the economy by printing money and buying financial assets.
Critics of this approach argue that each time the fed resorts to quantitative easing, it risks running out of room to cut rates furthe in a future crisis. During the GFC, the Fed was able to cut interest rates by over 5.00% to 0.00%. During the COVID pandemic, the Fed could only cut rates just over 2.0% before hitting zero interest rates. With increasing debt loads, it becomes harder for interest rates to rise during the reflation period, leaving policymaker with little room other than to continue printing money. Thus over two crises, the Fed Balance Sheet has grown over 7x from ~$1T USD to nearly $7T USD.
The value of gold has, so far, kept pace with the extent of monetary printing. So long as governments continue to print money, the value of gold should, in theory, continue to go up.
3. Gold prices will benefit from increasing geopolitical tensions, particularly between the US and China.
As China and the US battle for economic supremacy, gold stands to benefit. Geopolitical tension increases the ‘safe haven’ effect of gold as an investment. Rivalry between the US and China has only increased since COVID, as each economy looks to decouple supply chains and other critical relationships.
Another area of geopolitical tension is the status of the USD, which rival superpowers believe gives the US an unfair economic advantage. Although trade with the US accounts for only 20% of global trade, nearly ~80% of all trade is denominated in USD. The use of the US Dollar as the world’s reserve currency greatly increases the US’s power, as only its central bank (The ‘Fed’) has the ability to print US dollars. Hence, whilst the US can simply print more dollars to buoy its economy, any other country that prints currency risks immediately devaluing their exchange rate which could destabilize their domestic economies. Russia has already started to use gold as a key reserve asset for its central banks, whilst China looks to push for bilateral trade with important partners to occur in Chinese Yuan.
If more countries look to de-dollarize, gold could greatly benefit as a de-facto reserve currency, which it has always been since the time of the Egyptians. As the world becomes more politically polarized, gold prices should continue to increase.