Gold prices are down and the pessimism towards the precious metal is increasing daily; this is great news!
If you bought gold bullion when it was beginning its bull-run—and kept it—you are doing much better than people owning stocks during the same period.
Look at the chart below. It plots gold’s price (grey area), gold’s price performance (golden line), and the Dow Jones Industrial Average performance (red line) from 2001 to today.
Chart Courtesy of www.StockCharts.com
If you bought into the Dow Jones Industrial Average 15 years ago and never sold, despite stocks trading near an all-time high today, your return would be 67% (or just about four percent) a year using straight math. On the other hand, if you bought gold bullion 15 years ago, your return would be 296%, or an average of about 20% a year—that’s five times better than stock market returns.
What’s also interesting to note is that the reasons to own gold haven’t diminished; economic and political uncertainty is still present while buyers of the precious metal remain resilient.
Gold Prices Increase When Uncertainty Rises
Despite what I read about gold becoming ancient money in the information age, as well as how the U.S. dollar alone is supreme, it doesn’t change my mind about gold being the best hedge against uncertainty for the simple reason that it stores value. As it stands, there’s an abundance of uncertainty around the world. There are only eight ongoing (mainstream) issues that have the ability to escalate into something major and cause havoc in the global economy:
1. Greece. Even though it has a deal, Greece will never be able to repay its debt. What does this mean for the eurozone?
2. The conflict between Ukraine and Russia and how the U.S. and its allies will deal with it.
3. Continued crisis in the Middle East.
4. China’s economic slowdown and debt misallocation.
5. Japan and China islands dispute.
6. The continued printing of money by three of the world’s biggest economies: China, Japan, and the eurozone.
7. A new U.S. president.
8. The IMF’s possible inclusion this year of the Chinese yuan in its official basket of reserve currencies.
As Gold Prices Declined, Consumers Became Even Bigger Buyers
In July of this year, the U.S. Mint sold more gold in coins than any time since April of 2013. It sold 170,000 ounces of gold in American Eagle coins in July. (Source: U.S. Mint, last accessed July 30, 2015.) Other mints around the world have also said that they are experiencing higher-than-usual demand for the metals.
Central banks have also been very active buying gold bullion. The first quarter of 2015 marked the 17th consecutive quarter that world central banks were net buyers of gold bullion.
Where’s Gold Headed?
The way I look at it, gold has had a solid run to the upside. Over the past 15 years, it has outperformed most asset classes. As I said at the beginning of this article, lower gold prices today are good news for me because they enable me to buy more gold-related investments at what I consider to be increasingly bargain basement prices.