Chart of the Week

GOLD DEFIES THE NAYSAYERS

Aside from crypto, few assets are as polarising as gold bullion.

The gold bugs view it as the ultimate safe-haven asset and a proven hedge against fiat currency debasement. The bears take issue with its lack of yield and limited economic use. Unlike silver, which plays a key role in many industrial processes (including the green energy transition), gold demand is driven predominantly by investors and Central Bank reserves.

We often field questions about why gold doesn’t fare better, but its historic returns typically provide a pleasant surprise.

The chart below shows how well bullion has performed in recent years.

In the five years to end March ’24, gold in US dollar terms (red line) produced an identical gain to the global stock market’s 72% total return (dark blue line). If we strip out the dominant US tech names, gold has comfortably beaten the return of the FTSE World-ex US equity index, which advanced by 41% (in U$) over that period.

More relevant is its gain relative to global government bonds; another perceived safe-haven asset. The light blue line shows the FTSE World Government Bond index nursing an 11% loss over the past 5 years as yields have spiked in response to inflation and fiscal largesse.

Of the major asset classes only Bitcoin has outperformed with a staggering 1,600% total return, although you would have needed to stomach two separate 50%+ pullbacks along the way.

The key question is why are gold, bitcoin and the US tech stocks performing so well?

We believe there are multiple answers, but the common denominator is that their “scarcity value” is coming to the fore. In an era of fiscal dominance, like we are in now, Central Banks are ultimately being forced to fund excessive government debt burdens. This requires more and more money printing which, in turn, increases the appeal of any asset whose supply is growing by less than that of fiat currency.