Gold as an Investment Class – Why we see it as a highly risky asset?

Many investors consider gold as a relatively low-risk and safe haven asset class, with certain advisors recommending investments in gold as a core-part of an investment portfolio due to it’s perceived safe-haven status.

The typical arguments for holding gold as part of your investment portfolio include:

  • Hedge against Inflation / Storage of value: gold is often seen as a hedge against inflation and that gold prices move up when inflation is high
  • Hedge against Excessive Money printing: since there is a finite supply of gold, gold prices are expected to rise when the supply of money rises sharply
  • Hedge against home currency depreciation against the dollar: since gold is priced globally in dollars, a depreciation of the rupee will lead to an increase in gold price in Rupees (even if the prices are stable in dollar terms)

Studying Longer-term Gold Price movements

An analysis of longer-term price movements in gold (data over the last 50 years from 1973 to 2022), the very high degree of volatility & unpredictability of gold prices immediately becomes apparent. We break this long 50-year period, into 5-distinct bull & bear periods that clearly emerge. 

Conclusion - Gold is a risky & unpredictable asset-class

A study of the longer-term price cycle of gold, draws the following conclusions:

  • Unpredictable length of bull & bear-cycles: Bond, equity & real-estate cycles, are typically directly linked to the economic cycle and have more predictable lengths of a complete cycle (bull + bear). Gold historically has shown no clear linkage to an economic cycle and the length of the cycles are completely unpredictable. 
  • Gold does not behave as often expected (to inflation, money printing, wars): As can be seen multiple times in the past, where gold did not react as expected. This includes the 1980-2000 bear (where gold prices remained weak despite many uncertainties), the 2000-2008 rally (where gold prices rallied sharply despite no major concerns), the 2011-2016 correction (worst performing asset class over this period) and the rally from 2016 to Feb-20 (without any specific concerns on the horizon). 
  • Higher Volatility that other asset classes: Longer-term gold prices have actually demonstrated substantially higher volatility than either equity or real-estate (both asset classes that are typically considered riskier than gold). 
  • No intrinsic value: The lack of a stream of cash flows that allows for a calculation of an ‘intrinsic value’, effectively makes gold prices highly speculative in nature.