The Economic Case for Gold

Gold as an Investment: A Shield for All Financial Conditions

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:

1. Effective diversification
   • In a typical portfolio of stocks and bonds, gold’s historically low correlation with major asset classes and negative correlation with the U.S. dollar can reduce risk through diversification.
2. Hedge against inflation
   • Gold is priced in U.S. dollars. Therefore, as the purchasing power of the dollar falls due to inflation, gold becomes more expensive to buy, acting as a hedge against the eroding value of the dollar.
3. Long-term returns
   • Gold has always maintained its value in the long run. Between 2001 and 2020, gold’s annual return averaged 11.2%, outperforming other key asset classes including U.S. equities, bonds, and treasuries.
4. Low correlation with other assets
   • 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-high inflows in gold ETFs and, in turn, gold generated a 25% annual return.

Gold: Precious Today, Tomorrow, and Forever

With rapidly rising money supply and near-zero interest rates in response to the COVID-19 recession, the world is entering an era of quantitative easing, and possibly, higher inflation. This could create the perfect storm for gold, for three key reasons:

1. Gold has historically performed well during periods of high inflation (greater than 3%), delivering an average annual return of 15.4%.
2. The price of gold has historically tracked the growth in the global stock of M2 money supply.
3. Low interest rates reduce the opportunity cost of gold holding gold. Therefore, gold 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.

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