Equity markets experienced one of the sharpest and speediest declines in the first quarter of 2020, only to recover most of these losses in the four months to the end of July. The market moves have been nothing short of breath taking, with the swift action of governments and central banks to provide support in the form of fiscal stimulus and lower interest rates no doubt playing a role in the recovery. This, despite the economic ramifications of Covid-19 continuing to filter through to weak economic data and company earnings announcements.
One of the most significant winners year-to-date in 2020, has been gold. The price of the precious metal has risen 30% in US dollars since the beginning of the year (to the end of July), in the process becoming one of the most talked about trades of 2020. This has driven the performance of gold counters listed on the JSE – many of which are up over 100% since the beginning of the year – leading to them topping the list of best performers on the local exchange. Even long-term gold cynic, Warren Buffett, made news headlines recently when it was announced that his company, Berkshire Hathaway, added shares of Barrick Gold to its portfolio in the second quarter of the year. So, what is behind the sudden interest in the yellow metal? In this article, we look at the history of gold as an investment and what may have been driving the rise in the price of gold in 2020.
So, what can we conclude about gold from the evidence?
The introduction of gold in a portfolio is not guaranteed to improve risk, returns or risk-adjusted returns for every period. Rather, the track record of the precious metal is mixed, and gold can go through long periods of underperformance. The strongest evidence for holding gold appears to be as a safe haven in periods of significant market volatility. In our view, it should be viewed as an insurance policy rather than a core holding. Investors should also be wary of the hype currently surrounding the price movements of gold – after all, as Warren Buffett once famously said: “what the wise man does in the beginning, the fool does in the end”.
Michael Kruger, CFA® Investment Analyst Morningstar Investment Management South Africa