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When it’s the Best Time to Buy Gold?

Published by Karl Martin Karus in category Precious metals on 30.08.2021
Gold price (XAU-SEK)
18 269,50 SEK/oz
  
+ 3,94 SEK
Silver price (XAG-SEK)
216,08 SEK/oz
  
+ 0,46 SEK

Gold, a safe haven and countercyclical asset

Unlike a stock market or real estate investment, gold does not create wealth. Owning gold does not allow you to receive dividends or rent. So why invest in gold?

The main reason is that gold is a safe haven. For centuries, precious metal has been used as a currency of exchange. In fact, central banks around the world hold the largest reserves of gold. The Bank of France has more than 2,400 tonnes of gold in its vaults and the central banks of the eurozone hold a total of more than 10,000 tonnes. This is a way of increasing confidence in the currency.

And in times of crisis, when investor confidence is eroded, this is the characteristic that is sought after gold has always had value and always will.

In managing one’s assets, gold can therefore act as a shock absorber in times of crisis. When stocks fall, the price of gold tends to rise: gold is said to be a counter-cyclical asset. The chart below illustrates the inverse correlation between stocks and gold

Source: ▷ Stocks vs. Gold – 124 Year Chart | Longtermtrends

Although the inverse correlation between gold and equities is not perfect, it is notable that gold rose during the bursting of the internet bubble, the subprime crisis and the Covid-19 crisis.

 

Reasons to Buy Gold Even if its Price is Falling

The Federal Reserve has said it many times: we are in a period where its monetary policy stance is negative. We also have a Democratic tenant in the White House with very large spending plans. These things will inevitably lead to lower real interest rates, reducing the yield that a bond investor can expect to earn after inflation. And this is good news for gold prices. The continued weakening of the US dollar is also a good buying signal for precious metals. Finally, don’t forget that gold is used by central banks to hedge against both inflation and market risks; the Federal Reserve, Bundesbank, Bank of England, and People’s Bank of China all hold a significant proportion of their total reserves in gold.

ETFS Gold Inflows by Region

Data as of 30 June 2021

Sources: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council;

As we can see North American ETFs were the most important source of flows, even if the price of gold is falling, institutional investors took this opportunity to buy more gold at a discount price, we all know that for the long term gold prices will rise again and maybe surpass the high of last august at 2000 $ but for the short term as economic recovery is on and investors are mainly interested on stocks as central banks are keeping the interest rates low, the price of gold will probably stagnate or even get lower but that for us, is just another opportunity to buy it at lower prices.

CENTRAL BANKS: PILLARS OF THE VALUE OF MONEY

For this equation to be true, it is all the more vital that the central banks, which are responsible for minting and controlling the currency in circulation in a country or federation, have a sufficiently large reserve of gold.

Indeed, in order to limit the inflation of a currency, the constitution of a reserve of assets with a value based on the long term makes sense.

So, without necessarily going back to the gold standard that ended during the Great Depression of 1930, central banks have not hesitated to capitalise on this raw material.

The yellow metal is in fact one of the responses to the risk of currency devaluation in nations such as Thailand, Turkey, or even the United Kingdom, which must secure its economy as best it can in the wake of a very damaging Brexit.

 

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