In the past two years, investors have witnessed a remarkable performance from an unexpected source. While equity markets and bonds have shown respectable gains, gold has emerged as the standout performer, delivering a 54% return since September 2022. This surge outpaces both the FTSE 100's 25% total return and the S&P 500's approximate 50% gain.
The precious metal's ascent comes after a period of stagnation, highlighting its volatile nature. An investor who purchased gold in September 2011 would have waited nearly nine years to break even. This pattern of prolonged inactivity followed by sudden price surges is characteristic of gold's behavior in financial markets.
Several factors contribute to gold's current rally. Central banks have significantly increased their gold purchases, with Goldman Sachs estimating acquisition rates at nearly triple the post-2010 average over the last two years. This surge in demand is partly driven by a desire to diversify reserves away from the US dollar amidst growing economic fragmentation and geopolitical tensions.
Industrial applications are also bolstering gold demand. The metal's use in electronics and renewable energy technologies has expanded beyond traditional investment and jewelry markets. This increased industrial appetite, coupled with stable mining output, has created a supply-demand imbalance favoring price appreciation.
The interplay between inflation and interest rates has created a favorable environment for gold. As a perceived hedge against inflation, gold benefits from the current economic climate where price rises remain above central bank targets. Simultaneously, the anticipation of falling interest rates reduces the opportunity cost of holding this non-yielding asset.
John Pierpont Morgan once stated, "Gold is money. Everything else is credit." This sentiment underscores gold's enduring appeal as a trusted store of value. Unlike stocks or bonds, gold carries no counterparty risk and maintains global acceptance and liquidity.
"We have gold because we cannot trust governments."
However, the current enthusiasm for gold should be viewed with caution. Historical data shows that while gold can outperform equity markets over certain periods, its long-term returns can lag behind. The lack of intrinsic yield makes it challenging to determine fair value, unlike income-generating assets.
As we approach the final quarter of 2024, investors should consider gold's place in their portfolios carefully. While recent performance has been impressive, the cyclical nature of gold prices suggests that periods of rapid appreciation are often followed by extended consolidation or decline.
In conclusion, while gold's recent rally is noteworthy, a balanced approach to investment remains prudent. The precious metal's unique properties and historical significance continue to make it an intriguing asset, but its volatility and lack of income generation require careful consideration in any long-term investment strategy.