Historically, gold and other precious metals have been a safety net for investors who are looking to shield their money from the volatility of an uncertain stock market. Our current financial environment definitely checks off all those boxes and as a direct result, we have seen billions of dollars flooding into gold since the start of the year. If you need any more indication of the stability of gold, or rather, the lack of volatility, look no further than Warren Buffett purchasing a good chunk of one of the world’s largest gold miners in Barrick (NYSE: GOLD) earlier this year. Buffet is famous for mocking gold investors and downplaying the value of investing in the precious metal. Investing in gold is “going long on fear,” the Oracle of Omaha once said, but given the current climate, perhaps investors do have a reason to keep investing in fear.
Uncertainty of the stock market
Indeed, gold has been one of the great beneficiaries of the novel coronavirus in terms of valuation and popularity. Through August of this year, over $64 billion had been invested into commodity ETPs compared to only $7 billion through the same time period the year before, representing over an 800% increase in investments. This has led to new all-time highs in the pricing of gold, as just last month the price per ounce sky-rocketed to $2,073 or just under 7800 riyal an ounce before settling back down below $2000 at its current levels. There may be no more greater indication of the uncertainty of the stock market right now than over $60 billion invested in gold ETFs as well this year, which is over 50% higher than the last financial crisis in 2009. Dubai is well known for its gold markets and fascination with the precious metal, so it should come as no surprise that people in many parts of the world are hoarding actual gold bullion as well.
But is gold really the best place to park your money when the markets are unstable? Buffett is not known as one of the greatest investing minds of our time for no reason. Gold does not appreciate, it does not gain interest, nor does it pay you a dividend. It is relatively static in nature and acts mostly as a hedge against uncertainty rather than for long-term growth. Many gold investors do not actually know what the basis of their gold-backed investments are as some funds are based on gold producers, some are gold miners, while others are based on the actual bullion. In other words, it does not provide investors with any sort of diversification and is truly a “put your eggs in one basket” approach.
Can gold continue to be the hedge against a volatile economy?
Sure, but many analysts believe the worst of it is now behind us as investors practice caution leading up to the Federal Election in America. As long as COVID-19 continues to affect the global financial environment, it may be safe to assume that alternative investing outlets like gold or even cryptocurrencies can protect investors against a possible market crash.