October 29, 2020


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A steadily rising price of gold is a harbinger of bad news

A steadily rising price of gold is a harbinger of bad news

Source: Cor Wijtvliet

On August 5, the price of gold hit an all-time high of $ 2,041 per troy ounce. The price of gold has never been so high. The price has now fallen back below $ 2,000, but many think the current rally is far from over. The basis for the current surge continues to be central bank policies designed to absorb and mitigate the negative effects of Covid-19 on the economy and business. The consequence of this policy is that interest rates are extremely low and that due to large-scale purchases of debt, the return is nearly negative. At the same time, inflation expectations are starting to rise again. And so many investors think: give me an ounce of gold.

Gold has therefore become an increasingly important part of many portfolios in a world with extremely low returns. Even some hedge funds have switched to buying gold. Given the growing scarcity of the yellow material, some of these hedge funds believe that the price of an ounce may rise to levels of

$ 2,400 If inflation resurfaces and demand rises to levels comparable to Paul Volcker’s almost 40 years ago, they even dream of a price of $ 6,700.

What is new these days is that it is mainly ETFAre the ones who prop up the gold price by storing massive physical gold. A gold ETF like SPDR Gold Shares now has more gold in safes than a country like India, for example. According to gold propegandists, demand could continue for a while. Investors spent around 3% on gold. This quickly doubled in the 1980s. That way, the road for ETFs is much longer. Gold ETFs make up only 2.5% of total ETF managed assets worldwide.

Critics never tire of pointing out that gold is a very volatile investment. The price can rise sharply, but it can also fall sharply, as the 1970s (-55%) and the years after 2011 (-33%) have shown. And even now, critics say, there seems to be a swan stick-on effect. Investors get in as long as the price rises. And so the gold market creates its own truth! As long as a currency like the dollar seems to be steadily weakening, gold investors may feel like they are in control of their wealth by buying gold.

In short, there are several reasons for investors to buy gold. In fact, what is happening to gold is what has been going on with the big tech funds for a while. Again, there are a number of reasons for buying this limited number of stocks. Prices will continue to rise as businesses grow thanks to the transition from a physical to a digital world. Another motive is that these companies are financially sound and can give up. And then you always have the basic idea that central banks will step in to prevent deterioration if it matters.

Gold is one need to have Investment that more and more investors are interested in. The obvious result is that the price of gold exceeds (too far). Perhaps this overshoot is part of an overall picture that indicates a fundamental change in investor behavior. It seems that more and more investors are no longer viewing risky assets as risky. Junk bonds, for example, are becoming increasingly popular. The aspect of risk seems completely out of sight. The business cycle is no longer what it used to be, many seem to think. Many also thought that in 2008/09. We all know what it means when the mantra becomes dominant: this time it’s different!