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IF Insights: Making sense out of latest ‘Gold Rush’

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The prognosis for gold is improving with expectations that the United States Federal Reserve would start lowering interest rates in 2024

Not just stocks and bitcoin are reaching record highs in 2024. Right now, the price of an ounce of gold is higher than it has ever been—more than USD 2,354. That represents a 38% increase from its previous low point in 2022.

Furthermore, even though gold prices are at an all-time high, a lot of market observers still find it attractive. Although the current state of the economy has been favourable for stocks, Tim Hayes, chief global investment strategist at Ned Davis Research, noted in a recent note that it has been “much more optimistic for gold.”

Investing experts advise that gold should have a completely different position in your portfolio than equities or bonds, even in the event of a positive outlook.

For some investors, the yellow metal may be a suitable means of diversification due to its tendency to move differently than more conventional investments; nonetheless, don’t utilise it as a substantial component of your portfolio. Warren Buffett, the chairman of Berkshire Hathaway and a multibillionaire investor, is well-recognised for avoiding it.

Why Have Gold Prices Spiked?

Various investors give various justifications for their gold holdings. Firstly, despite its inconsistent history, it is believed to hold or even appreciate during inflationary times. Furthermore, as gold has been used as money for millennia, it is seen as a store of value if paper money experiences a sharp decline in value.

Additionally, it is typically anticipated to endure in “risk off” markets, when investors typically shift from riskier investments, such as equities, into what are thought to be safe-haven assets, such as gold and bonds. This indicates that during and before recessions and bad markets, investors typically purchase more gold.

According to Ford O’Neill, co-portfolio manager of the Fidelity Strategic Real Return Fund, a mutual fund strategy designed to protect investors from inflation risk; this explains why the recent gold upswing has been a little odd.

Since 2023 October, “it’s been anything but [a risk-off market],” he claimed, while explaining, “I think we’ve seen what I would refer to as an ‘everything rally,’ in which many assets have clearly performed extremely well.”

As per O’Neill, the main reason gold is performing well is that investors are driving up the price of almost everything, including equities, bonds, and cryptocurrencies.

According to Tim Hayes, gold prices have recently increased due to a rising tide as well as a declining US currency and decreasing bond rates. He tells CNBC Make It that with lower rates, gold “has less of a competitive edge” versus bonds and cash accounts.

Furthermore, the prognosis for gold is improving with expectations that the United States Federal Reserve would start lowering interest rates in 2024. The opportunity cost for investors to store gold, which yields no interest, decreases when interest rates decline.

Hayes states, “We remain bullish on gold.”

Things To Consider During Gold Purchase

Purchasing an exchange-traded fund (ETF) that tracks the price of gold is the simplest way to increase the amount of gold in your portfolio. By doing this, you can monitor how gold performs in comparison to the other investments in your portfolio and avoid having to pay a high price for actual gold ownership.

However, gold is an asset that yields no income, regardless of whether you keep it in your safe or your brokerage account. For this reason, the most well-known long-term investor in the world never touches the assets.

The price of obtaining all of the world’s gold, according to Buffett’s 2011 letter to shareholders, could purchase all of the cropland in the United States, leaving enough cash over to purchase ExxonMobil sixteen times over. One of those alternatives will have produced a bountiful harvest and plenty of dividends when you return a century later. There would still be a lot of gold in the other.

An ETF that tracks the spot price of gold has returned an annualised 5.5% over the last 15 years, while the S&P 500 has returned 15.3%.

Gold has a checkered track record when it comes to inflation. Even though inflation has been constant since 1988, gold has underperformed in 18 calendar years, including 2021 and 2022, which are years with exceptionally high inflation.

Some investors find that holding a small amount of gold gives them peace of mind if other assets drop.

William Bernstein, the author of “The Four Pillars of Investing,” recently stated to CNBC that “gold is the one item that’s likely going to do well when everything else is going down the tubes.” “When there is a fire, home insurance also has a significant return.”

Nevertheless, in the long run, assets that increase in value and yield return at a compound annual growth rate are preferable. Remember Buffett’s advice.

Buffett stated in 2011 that while gold has some industrial and decorative value, the market for these uses is small and unable to absorb increased supply.”

“Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end,” he famously said.

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