Article

How We Think About Gold


May. 7, 2020

When market volatility strikes and investors look for safety, they often turn to gold, and today is no different.

Gold prices are on a run, reaching their highest level in seven years last month. The potential for negative economic growth is the primary driver of the gains, as well as a combination of factors including lower interest rates, higher levels of government debt, and geopolitical uncertainties.

In such an unprecedented era, many investors are wondering if now is the time to own gold. Below, we take a closer look at gold as an investment and then answer the question of whether owning gold is something that we think makes sense today.

Why Gold is Special

Gold has immense historical significance. It is one of the oldest and most famous investments, and many investors believe it is a very safe way to store money.

It is this belief that makes gold special. Otherwise, it would just be a rock in the ground like any other mineral. Yes, it is shiny. Yes, it is scarce and essentially indestructible. But beyond those main attributes, there is little reason why gold would be particularly special.

We—people—give it its special nature by our belief that it is special. The logic is obviously circular, but it also is what makes its value resilient. So long as people continue to believe that this particular commodity has a special value, then others are likely to believe it too, and it will have value.

Certain other commodities have similar characteristics, such as the other so-called ‘precious metals’ like silver, but few have the special financial properties in such abundance as gold.

How We Think About Gold

Investing in any commodity-related security requires a deep understanding of what drives its value. For most commodities, that requires a thorough analysis of its use cases. For example, an investor would want to know how copper is used before investing in it.

For commodity-sensitive industries, we use what we call our Hurdle Rate strategy to determine whether it is worth our investment. The Hurdle Rate strategy provides an investment framework for analyzing supply and demand trends.

When conditions are right, our framework would want to see that a commodity’s demand is going to outstrip its supply. When there is more demand than there is supply, its price will rise, all else equal. Our goal is to wait for the right time.

We apply this Hurdle Rate strategy for gold, but with an extra twist. Gold’s supply and demand dynamics are unique. Most metals are used primarily for industrial purposes, and their demand tends to be closely linked with economic growth. Gold’s primary uses are financial, and it tends to be much more closely linked with financial markets.

Gold as an Investment Today

We would want to see gold’s supply and demand characteristics align before making a long-term investment in gold.

Because gold’s primary uses are financial, in order to forecast gold demand, we must forecast investment demand. Investment demand is notoriously fickle, but in general, gold is viewed as a safe-haven asset. When risks are rising, gold tends to do well. The primary macroeconomic factors impacting gold are inflation rates, interest rates, geopolitical uncertainty, and central bank reserves.

On the supply-side, gold mining has become increasingly difficult. Mining at a commercial scale is costly and time intensive. It takes years of lead time before a new mine actually produces gold, and new gold discoveries are often in less than ideal locations. These factors, combined with increasing gold scarcity and ore-grade declines, put persistent pressure on new gold supply.

Bringing the supply and demand sides together, we do not yet believe this perfect storm of conditions has arrived. In the meantime, we will continue to monitor gold for a potential entry point, following our time-tested investment disciplines.

For more insights like these, subscribe to our Markets & Economy blog to receive email updates when new viewpoints are available.

Source: Bloomberg.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Want regular insights into financial planning and investing-related topics?

Subscribe

Share

Sign up to receive the latest financial planning and investment tips and news.

View all Preferences