Investment Case For Gold As The Yellow Metal Charts New Record Highs

Investment Case for Gold as The Yellow Metal Charts New Record Highs

The ongoing pandemic injected unparalleled uncertainty into the global economy, in a fashion that no model or market forecast could have possibly predicted. The impacts of the worldwide shutdown nearly defy human comprehension, marshalling unprecedented change into our economic outlook, our way of life, and importantly, our investments. With nearly 50 million Americans having applied for unemployment, hard assets, gold in particular, have enjoyed a resurgent enthusiasm as investors seek sources of potential stability amidst one of the most profound crises on record.

As the World’s Oldest Asset, gold may tackle some of the complex investment challenges with a simple, inexpensive solution. The GraniteShares Gold Trust BAR is one of the lowest cost means for physical gold investment (only a 0.1749% management fee) with each share backed by 1/100th an ounce of physical gold in a secure London domiciled vault. Before discussing the BAR product specifics, an understanding of gold’s role in an investment portfolio, during market conditions both fair and foul, may be essential. During the current market climate specifically, these three contentions encapsulate the case for gold:

  1. Potential Safe Haven Investment
  2. Significant Diversification Benefits
  3. Dollar Insecurity in the New Fed Paradigm

While these three arguments for long term gold investment are applicable throughout all stages of the market cycle, the COVID-19 pandemic has amplified their significance. Indeed, this global crisis has prompted a societal rethink on all matter of subjects, and yet the case for gold, though not without risk, may be the most ebullient in generations of market history. With a mindset backed in hard data, we will explore how the current economic uncertainty intersects with each of these three rationales for gold investment.

Potential Safe Haven and Asset Stability

Quite simply, there is a reason even after abandoning the gold standard global central banks continue to hold over 30,000 tons of gold in reserve—the precious metal has carried enduring value for millennia. Worth over $1.5 trillion, these gold holdings prove that gold’s legacy as a monetary metal continue into the present day, providing an asset that is scarce, highly liquid and uncorrelated to broader markets.

Notes: The performance of stocks is represented by the S&P 500 Index,
and the performance of bonds by the Bloomberg Aggregate Bond Index.
Total returns through 6/25/20. One cannot invest directly in an index. Past
performance is not a guarantee of future returns. Source: Bloomberg data.

Yet it is gold’s capacity as a potential safe-haven that often garners investor interest, as during periods of severe market stress, gold has historically benefited from “flight to quality” inflows. In other words, when going defensive, one may be hard pressed to beat the gold standard of gold itself. As can be seen in the chart above, gold has outperformed both stocks and bonds throughout the depths of the sell off on a year to date basis, and has continued to make new highs on the year.

Amid the 2008 financial crisis, gold was one of the few assets to end the year in positive territory, up 5.8% compared to the stock market’s -37% collapse. Gold’s security as an investment stems from its status as one of the few assets that is not someone else’s liability, and can never go bankrupt. Given that the COVID-19 pandemic has prompted an unprecedented wave of non-payment, default and bankruptcy, the benefits to holding real assets not subject to counterparty risk should not be undervalued. Yet importantly, this potential security has not come at the cost of long term performance, with gold having appreciated at a compounded rate of 8.3% annually from $35/oz. in 1971 to $1,765/oz. in 2020—a 50-fold increase in value.

Amidst the age of Coronavirus, gold exemplified this historic safe-haven characteristic; not only is gold firmly in the green, but it has also been one of the best performing assets for the year (as of 6/30/20). With the physical economy shut down, assets in gold Exchange Traded Funds (ETFs) swelled to a record high of over $90 billion as investors fled from risk assets. Indeed, as depicted in the chart below, 20 million ounces of gold were flown into New York to accommodate the surge in gold trading demand, an episode financial history may soon recall as the “New York Airlift.” In essence, when a crisis unlike any other struck that questioned the value of paper assets, gold was one of the few investments that not only safeguarded wealth, but actually increased it.

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Disclaimer: Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information ...

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