Ken Fisher: room to cash in on the benefits of the gold boom
Strong fluctuations and few fundamentals, investing in gold is as unpredictable as the game of chairs
by Ken Fisher
Will gold continue to shine? With a 40.6 per cent rise as of 10 November, gold is outperforming global equities - and even the FTSE MIB's notable gains - this year despite recent swings. Trade war fears, persistent inflation fears and the Bank of Italy's famous gold treasury are all fuelling the allure of this precious metal. But beware: to make money with gold, you need good market timing. If you invested in gold before its rise, great. Luck never hurts. But now think again.
The scenario
I am not trying to anticipate gold prices. No one is able to do that reliably. I learned to refrain from doing so more than 50 years ago (and I tend to make a lot of predictions). Despite countless myths, gold is an unpredictable and extremely volatile commodity, lacking in profits, adaptability, dividends and, hear, hear, lacking a functional investment purpose. Over the long term, since 1974, when de facto restrictions on the gold standard were lifted in the United States, gold has posted annualised returns of 9.2% in euros and lire. Italian equities have performed similarly, while global equities have posted an annualised gain of 11.8%.
Lower long-term yields should be accompanied by significantly lower volatility. In the case of gold, this is not the case. Consider one-year standard deviations (i.e. the extent to which annual returns deviate from averages). Gold's has been 18.8% since 1974. Global equities have experienced a much lower volatility of 15.4%.
The volatility of gold
High relative volatility leads to sporadic large gains and sharp declines, interspersed with long periods of no significant change. This is how gold behaves. Want an example? In 1980, the gold price peaked at $850. Then it plummeted, returning to that high only in 2008: a full 28 years later! A period punctuated by sharp rises and lasting falls. Gold proved to be an ineffective hedge against inflation, which eroded its value throughout this phase. Let us take another example in euros: in 2012 gold reached EUR 1,384.73. Then in 2013 it collapsed by 37.0%, only recovering this loss in 2019.
As you can see, in the case of gold, timing is crucial. Are you able to pinpoint the exact timing? Few are. In any case, with so little fundamental data, the concrete basis on which to make forecasts is very limited. Gold's fluctuations are almost exclusively dictated by changes in sentiment, i.e. the mood of investors.
