Why do many prefer to invest in Gold?

Investing in Gold is attracting more interest in recent months. The ultra-expansive policies of central banks make gold more attractive to investors. Exception monetary policies practiced by central banks after the financial crisis (ultra-low interest rates and massive asset purchases) were expected to be transitory. Investors thought that, after this exceptional period, the central bank's policies returned to "normalcy."

Unexpectedly, in the first half of 2019, central banks made it clear that the era of normalization was over. In the United States, the Federal Reserve is ready to begin a new cycle of interest rate cuts. In Europe, the ECB, which has not even begun to raise interest rates, is ready for a new cycle of monetary stimuli, from a position with negative interest levels regal assets.

This has caused a great hurry on the part of the investors to buy any asset that offers some profitability, which caused an increase in the price of the fixed income and a decrease in the effective rates (which fall when the price rises). At this time, most of the Treasury bond market in Europe is trading with a negative return.

Therefore, a European investor looking for a positive return can buy Treasury bonds from an emerging market country (with more credit risk) or he can buy foreign Treasury bonds, such as US Treasury bonds. UU. However, in this second case, you would be exposed to the exchange risk (the risk associated with a possible fall in the value of the dollar, which would not compensate for the additional profitability of investing in US Treasury bonds), unless You decide to cover this exchange risk. Although, the implicit cost of coverage would consume the entire differential in interest rates.

And what about corporate bonds? As you can see in the following table, the bonds issued by the best rated companies are traded with negative returns. A corporate BBB bond with a 5-year maturity will have an average yield of 0.22%. When the transaction costs are taken into account, there is very little return and we must also bear the risk of changing the bond price due to movements in interest rates or changes in the solvency of the company.

THE GOLD AN ALTERNATIVE

Investing in gold is the safe asset by definition. Investors who buy gold receive no financial reward for owning it. Gold pays no interest. This implies that investors, when choosing gold, agree to give up guaranteed income in the form of interest or dividends from other financial assets. This is called the opportunity cost of owning gold. Since the return offered by the assets is collapsing, the opportunity cost of owning gold has declined substantially and this has caused a lot of buying interest from investors.

You can see in the graph below the inverse relationship between gold (in white) and the yields of US government bonds at 10 years (in green).

In the following graph we see how the price of gold closely followed the amount of debt negotiated at negative performance.

Gold profitability accumulates around 12% since the beginning of this year 2019. Of course, investing in gold has to assume greater volatility when compared with the volatility of fixed income, but taking into account a context in which the Fixed income profitability potential seems extremely limited (if not negative), the reasons for investing in gold increase considerably.

Gold also offers a lower correlation with other markets, being its correlation with the global equity index of -0.13. Remember that correlation measures the degree to which assets tend to move together and is measured by a number that varies between 1 (perfect correlation) and -1 (perfect negative correlation). Having a portfolio composed of assets that do not all move in the same direction is a good idea as it helps mitigate the risk of the portfolio incurring losses because the assets fall at the same time.

Recently, Ray Dalio, one of the smartest investors in the world, has published a long note explaining why gold could be an interesting investment. According to Dalio, central banks will run out of ammunition, as there is a limit from which the reduction in interest rates and the purchase of assets will not be sufficient. There will be a boost on the part of nations to depreciate their currency and monetize fiscal deficits. In this type of environment, the storage of wealth in gold will become more attractive to investors. «Those investments that will probably behave better will be those that do well when the value of money is depreciated and national and international conflicts are significant, such as gold. Recall that Ray Dalio has already incorporated gold (and even raw materials) into his All Weather portfolio, at the time, “why (he) considered them a good asset in high inflation environments that can have a negative impact on equities and bonds”

In inbestMe we have never been big fans of investing in gold, but we believe that, in the current unexplored economic situation, in which the returns are negative and the money printing machines work endlessly, diversification with gold makes a lot of sense. In this context, gold will undoubtedly be an asset that reduces risk and possibly also an asset that helps improve performance.