How “Relativity” Plays into Gold Investments
Posted onThe world is complex and it’s getting more complicated. The global marketplace is increasingly interconnected. What impacts one economy impacts another. This dynamic is also true of investment vehicles. Assets as different as equities and gold influence on one another.
This concept is important in today’s stock market because a dimming equities picture is forcing investors to remember that holding onto stocks means forgoing the opportunity to own precious metals that have long been undervalued during the recent years of surging stock prices.
As a result, investors are no longer judging gold in a vacuum. They’re judging it, consciously or not, against all other options. That is, they’re considering the “opportunity cost” of investing in gold. The opportunity cost is the value an investor foregoes when they choose one asset over another. For example, a choice to purchase stocks instead of gold means that the investor is not only spending money on the shares, they’re spending their opportunity to own another appreciable asset like gold.
Today, gold is strong relative to equities. Over decades we’ve seen the two assets trade the status of a rising investment. In the late 1990s we saw gold dip in value as equities increased in value. By 2007 this trend reversed. The S&P 500 fell, and gold began a meteoric rise from approximately $664 per ounce in late 2007 to $1,774 in late 2014, a gain in value of 167%.
For a period in 2018 this trend reversed again. Now, we’re seeing gold on the rise once more as investors cool on equities amid increasing tariff concerns, tempered financial forecasts, and diminished optimism among US business leaders. Gold looks favorable relative to stocks.
Additionally, gold is favorable relative to lower risk assets like US government bonds. In late October the value of the 10-year treasury started to drop. This matters to potential gold investors because bonds are yield-bearing investments unlike gold. Therefore, bonds often represent competition for dollars that might otherwise go towards gold.
Relative measurement in investing is important because it helps investors understand opportunity costs. Moreover, it underscores the importance of diversification. Many misunderstand this word and assume that owning a diverse portfolio of stock is a diversified approach. In reality, many stocks are highly correlated. In fact, even US and international stocks have become more correlated over the decades. Consider that between 1990 and 1999 the correlation between these two groups was 0.56. From the period ranging from 2000 to 2017 this figure grew to approximately 0.87. Many equity investors are unaware of how little diversification exists in their portfolio.
Moreover, this same research shows that over a 10-year period a portfolio consisting of 60% stocks and 40% bonds “had a correlation of 0.99 to a portfolio that was invested entirely in stocks.”
As we move into a new chapter of the global economic story investors need to think more strategically about conventional tactics for growing their savings. Gold offer not only value, but relative value.