Gold is in the news. Why? Because it’s going up. And it’s at an all-time high.
People have been seen queuing down the street in capital cities to apparently buy gold. For some people, this is evidence of further gains to come. For others, it’s signs of retail investors acting on emotion.
Problem is, if it’s the later, buying gold at some past all-time highs has proven to be a costly mistake. Historical patterns show that gold peaks have been followed by sharp corrections and long winters of loss.
A notable example is the 1980 peak. Gold hit nearly $850 per ounce (over $3,000 in today’s dollars) amid rampant inflation and geopolitical tensions. It then plummeted over 60% within two years. Worse, it languished, doing essentially nothing for the next two plus decades while broader markets advanced significantly.
The current gold run-up to record highs has been propelled by renewed inflation fears, escalating geopolitical conflicts like the Russia-Ukraine war and Middle East tensions, aggressive central bank buying (especially from China and India), and a weakening US dollar amid large fiscal deficits. This is somewhat similar to past cycles where macroeconomic anxiety drew in speculators, only for them to be punished.
More recently, in 2011, gold surged past $1,600 per ounce again due to economic uncertainty, with hedge funds and retail investors piling in. This was a sixfold increase since 1999. Further optimistic forecasts came after that big run-up. Analysts in mid-2011 predicted gold hitting $3,000 per ounce, fueled by US debt woes, the eurozone crisis, and inflation fears. Yet, after peaking near $1920 in September 2011, prices stagnated and eventually dropped below $1100 by 2015, a 45% fall. Leaving those later buyers with significant losses.
The old retail investor usually flocks to gold during these emotion and media hyped peaks, as seen in the 2011/12 surge. Then physical bar and coin demand jumped over 20% to record levels, with strong buying in Europe, Asia, and among small investors fearful of hyperinflation and government debt. The same things we’re hearing about now. Central banks also turned net buyers, adding to the frenzy.
In contrast, you don’t see lines around the block or many media articles during selloffs or when gold is at multi-year lows, such as the sub-$1,100 trough in 2015. For anyone who considered themselves an investor and not a panicked speculator, this would be when buying gold would usually position investors for better long-term returns, rather than just chasing momentum, but those who are panicked usually only buy at the top.
While we don’t have gold in our own portfolios, if an investor wants to own gold independently the only thing we would suggest is perspective. Firstly, you don’t put all your money in one asset. And don’t take our word for it, one of the world’s most prominent gold advocates and investors is Peter Schiff. Schiff, who never stops talking about gold, recommends and personally holds only 5-10% of his portfolio in physical gold and silver. Only 5% to 10% of a portfolio. That’s all!
That would seem reasonable. And it highlights a key point of any investment philosophy: diversification. Like any asset, if you’re planning to invest in gold, it should form one part of a balanced portfolio to mitigate risks. Especially during periods of euphoria.
And just remember, holding gold isn’t free. It costs money to store!
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
With thanks to FYG Planners for this article