Gold’s golden run – but can it continue?

Gold is seen by market participants as a safe haven asset and a hedge against the volatility risk inherent in capital markets. In times of economic turmoil or recessions, investors fly into this defensive asset class as it has been seen to markedly outperform more risky assets such as stocks and bonds.

Gold also has use as a store of value, a hedge against the risk of inflation. This is especially prevalent in the current economic environment, with central banks globally keeping interest rates low and unprecedented amounts of fiscal stimulus driving money supply to levels never seen before. The indicators are starting to emerge that inflationary pressures may pick up during the remainder of 2021, which could light a flame under the spot price of gold.

Gold is an ‘insurance policy’ against all forms of volatility – market risk, political risk and inflation.

Gold Performance to 31 December 2020 (% per annum):

Quarter1 YR3 YR5 YR10 YRSince 31/12/1999
Gold in US Dollar0.223.613.512.139.3
Gold in Rand-13.328.719.911.211.614.0
Gold in Euro-4.412.312.

Source: The SA Bullion Gold Report Q4

Gold has delivered a return of 14% per annum (in rand terms) since the start of the millennium, a return that would compete with most asset classes over the comparative period.

Physical gold vs gold shares? 

Investing in gold shares is a much riskier investment than physical gold (bullion). Although gold counters generally operate as a proxy to the commodities spot price, factors such as management’s ability to control costs and capital allocation are integral to the company’s performance. Gold miners are generally highly leveraged, which means that they take on more debt in order to produce more of the commodity. This results in gold shares outperforming bullion during gold ‘bull markets’ and underperform when the spot price of gold declines.

At the end of the day it comes down to an investors risk profile. The more risk averse investor will side with investing in physical gold whilst the risk-taker will seek additional returns by investing in a gold miner. 

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