The Gold Rush of 2020

Courtesy of UngerBoeck

By Shivin Verma

Gold reached an all time high in early-August, surpassing 2,000 USD/ounce for the first time. Just a couple weeks later, the S&P 500 hit its own all time high. Modern portfolio theory would suggest that the markets must have inverted radically in those two weeks – but as we know, this was not the case. 

Warren Buffett, who previously described gold as “neither of much use nor procreative”, bought a $565 million stake in Barrick Gold. The Oracle of Omaha was accompanied by many major investors including Ray Dalio’s Bridgewater Associates in the gold rush of 2020.

Historically, gold prices have been negatively correlated with stock market performance. In the 1970s, gold saw a 2,300 percent gain while stock investors experienced relatively flat returns as oil price shocks and political instability raised uncertainty. In contrast, the 1980s and 1990s were great for stocks, but terrible for gold. While the S&P 500 saw almost 18 percent annual returns for two decades, the gold market was volatile and flat. 2008 saw stocks drop substantially while investors migrated to gold.

The price of gold is driven by demand in two key markets – the physical gold market and the financial gold market. The former saw a decline in demand due to the pandemic, as lockdowns forced retailers to shut down and the subsequent recession drove consumer habits away from luxury spending. Therefore, the financial market – reflected through ETFs and stocks (such as Barrick) – must have driven the prices higher. 

A deeper look into the rationale for investing in financial gold markets reveals that more investors pile into the commodity as a hedge against growing uncertainty. Traditionally, gold has served as a safeguard in the event of destabilizing shocks. Investors, who typically were able to diversify their portfolios equally between equity and bonds, now faced a situation where they felt stocks were overbought and record low interest rates made bonds undesirable. Therefore, their best choice was to split their portfolio solely on equity and gold.

Thus, while it makes sense that investors are migrating to gold in light of the Covid-19 pandemic, it is odd that the stock market is likewise performing well. 

Perhaps Buffet and Dalio – both seasoned investors – recognized an anomaly in the underlying rationale for recent stock performance. Today, this takes the form of Robinhood and commission-free trading. Influenced by the likes of Barstool Sports’ Dave Portnoy and his mantra that “stocks always go up”, this new generation of investors have unduly exerted influence on the market. Value investors may therefore recognize the potential downside for overpriced stocks and opt for gold as a hedge.

In August, Barrick CEO Mark Bristow appeared on CNBC to claim that “gold is the reference currency of the world,” arguing that gold is now an essential part of the portfolio.

This begs the question – how lasting is this new role of gold?

If the pros are right in anticipating an imminent recession, we may see the 20’s as another robust decade for gold compared to the stock surge of the 10’s. However, seeing as there is no sign of slowdown in the growth of commission-free trading, the same pros may need to learn to adapt to a new age of investing.

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