Gold has experienced a recent surge, climbing almost 9 per cent, leading some to anticipate further gains. However, investors who have profited from this rally should carefully reconsider gold’s role in a long-term investment strategy. Gold’s success hinges largely on chance, not skill, and while many tout its hedging capabilities, gold lacks fundamental portfolio characteristics like earnings, dividends, and adaptability.
Gold mining companies present a different proposition. Unlike gold itself, these companies generate earnings, distribute dividends, and can enhance profitability through cost management, acquisitions, and expansion. While gold has delivered an annualised gain of 9 per cent in Australian dollars since the end of the gold standard in 1973, both world and Australian equities have outperformed it, achieving 11.3 per cent and 11.4 per cent respectively. Data in US dollars echoes this trend, with US stocks surpassing gold’s annualised returns.
Despite its lower long-term returns, gold exhibits high volatility. Since 1973, gold’s standard deviation has exceeded that of both global and Australian stocks, indicating greater fluctuations in yearly returns. This volatility often manifests as negativity, with gold rising in fewer 12-month periods compared to stocks. The myths surrounding gold as a tariff or inflation hedge, or a safe haven during bear markets, are largely unfounded. For instance, in 2022, gold’s high occurred in March, followed by an 11.9 per cent decline through late July, demonstrating its unreliability as a safe haven during periods of market downturn.
Ultimately, gold’s price movements are driven by sentiment rather than fundamentals. Predicting sentiment is risky, akin to playing musical chairs with money. Investors should recognise that market fears are often already factored into gold prices. Those who have recently profited from gold investments should consider adopting a more robust, long-term investment strategy. The precious metal delivers bond-like returns with stock-like volatility.
