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Owning Gold Is Not About US Hyperinflation Fears

Owning gold is back in vogue. Last year the price of the precious metal posted its strongest annual gain since 2010, rising 13.09% to close the year at $1,303 per ounce. And since the end of 2017, gold has continued to rise hitting a high of $1,360/oz this week as the value of the US Dollar has slumped.

This performance means that gold has now outperformed a similar investment in the S&P 500 over the past 16 years. According to analysis from Sprott Asset Management, gold has now posted positive annual performance during 14 of the past 17 years, amassing a compound return of 9.7%, “significantly exceeding the 6.2% compound return of the S&P 500 Index (including reinvestment of dividends).”

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Owning gold: Is it still worth it? 

Owning gold as part of a well-diversified portfolio has always been recommended. However, investors have avoided the asset due to three main misconceptions including the view that gold is only a catastrophy asset, its performance is inversely linked to that of traditional financial assets, and rising short-term interest rates are bad for the gold price.

Last year, all three of these common misconceptions were dispelled. The price of the yellow metal recorded a double-digit gain despite rising US rates, a rising stock market and favorable financial environment, but will this continue?

Trey Reik Senior Portfolio Manager, Sprott Asset Management believes it will and notes that owning gold in the current environment is as attractive as ever. In an interview with ValueWalk, the analyst noted that the gold trade is “not about a dollar collapse or Weimar Republic inflation” rather it is a play on the “migration of global wealth from the $290 trillion stock of global financial assets to the relatively tiny stock of investable gold, roughly $2.8 trillion currently.”

As a percentage of global assets, the rate of migration has been “1/10th of one percent on average,” which is easily enough to result in a “significant positive price dislocation” in a market with a total size of only $2.8 trillion.

The idea of owning gold is also proving more attractive to investors as the US drowns in debt. Total US credit market debt currently amounts to $68 trillion, and Sprott estimates “credit creation on the order of $2 trillion-or-so is now required to keep the US debt pyramid from toppling.” With the Federal Reserve at the beginning of its tightening cycle, as of yet, it’s not clear how long the US will be able to sustain its debt addiction. The weakening US dollar is a reflection of this as it reflects “mounting concern for a deteriorating US fiscal position,” which is generally good news for the gold price.

As a hedge against market turbulence, gold remains attractive as, despite its rise in 2017, “gold maintained about 25% negative correlation to the S&P” during the year according to Trey and  “over the past ten years, the correlation measured positive 2.9% (near zero).”