Gold prices have increased by 8 per cent on an annualised basis since 1971, comparable with that of equities but higher than that of bonds. The precious metal has outperformed many other asset classes over the past three, five, 10 and 20 years besides 2024, the World Gold Council (WGC) said in a research “Gold as a strategic asset”.
Since 1971, when the US gold standard collapsed, the yellow metal has outpaced the US and world consumer price indices. It also protects them against high inflation. (The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932 as well as from 1944 until 1971 when the United States unilaterally terminated convertibility of the dollar to gold.)
Helping capital grow
“In years when inflation was between 2 per cent and 5 per cent, gold’s price increased 8 per cent per year on average. This number increased significantly with even higher inflation levels. Over the long term, therefore, gold has not just preserved capital but also helped it grow,” the WGC research said.
Gold’s position as an investment and a luxury good has allowed it to deliver annualised returns. The diversity of its sources of demand help to make gold a less volatile asset than some equity indices, other commodities or alternatives, it said.
The research said since 1971 gold has significantly outperformed all major currencies and commodities as a means of exchange. The precious metal has continued to outperform most major currencies in the recent past.
One of the key factors for the robust performance is that gold mine production has grown only 1.7 per cent annually over the past 20 years.
Performer during deflation
The WGC said its research showed that the precious metal does well during deflation. “Such periods are characterised by low interest rates, reduced consumption and investment, and financial stress, all of which tend to foster gold demand,” it said.
When quantitative easing measures were implemented in the aftermath of the global financial crisis and Covid pandemic, many investors turned to gold to hedge against currency devaluation and preserve their purchasing power.
During the global financial crisis when equities, hedge funds, real estate, many commodities and other risk assets tumbled in value, gold held its own. Between December 2007 and February 2009, gold prices increased by 21 per cent. “And in the most recent sharp equity market pullbacks of 2020 and 2022, gold’s performance remained positive,” said the WGC research.
The yellow metal can also deliver a positive correlation with equities and other risk assets in positive markets, making gold a well-rounded efficient hedge.
Correlation with equities
“The gold market is large, global, and highly liquid. We estimate that physical gold holdings by investors and central banks are worth approximately $5.1 trillion, with an additional $1 trillion in open interest through derivatives traded on exchanges or the over-the-counter (OTC) market.
However, the precious metal also carries a couple of risks. Firstly, gold has an asymmetric correlation profile with equities; it does much better when equities fall than it does badly when equities rise.
Secondly, it does not provide a regular income, unlike other asset classes such as bonds, property or even some company stocks. For this, the WGC says, the reason is gold has no credit risk. “There is no promise to repay. Nor does it bear any counter-party risk. This means, however, that investors depend on price appreciation to benefit from gold. And in this regard, gold has a good track record,” the research said.