Gold appreciates 6.7% in 2023; find out if it’s an opportunity – 06/04/2023 – From Grain to Grain

Naturally, we are attracted to assets that appreciate in value. When it comes to an asset that brings us the image of something precious, this attractiveness is even greater. This year, gold brings together the two qualities of attraction. However, does it make sense to invest right now?

I’m not a fan of assets that don’t produce income and the only justification for buying it is that the demand for it might increase. Gold falls into this category.

However, I am not against investment. It may form part of a small portion of a diversified portfolio of risky assets. Like this commodities in general.

However, you have to be very careful with the investment.

Most individual investors who buy it buy on the enthusiasm of social media influencers who create conspiracy stories to justify the investment. I’ve heard enough of each story to laugh and take my breath away.

Remarkably, the average individual is attracted to conspiracy stories or unrealistic promises. This is one of the main reasons why so many people fall for scams.

Let’s get to the facts.

Over the past ten years, gold has appreciated by an average of 3.1% per year. In 2021 and 2022 he devalued himself. In 2022, when several risk assets like stock exchanges in the world fell, gold also fell. Yes, gold is also a risky asset. The volatility of gold returns is similar to that of stock exchanges.

Let’s understand what happened recently to explain the rise. Then I explain how you should bet if you want to win with metal movements.

Over the past year, the US has used its currency, the dollar, as a source of economic pressure against Russia. This made several countries reflect on the diversification of their reserves. Gold was undoubtedly one of the selected assets.

Understand that countries and large institutional investors often buy gold not because they believe in an advantageous absolute return. One of the main objectives is protection and diversification. But it is not the concept of protection as you, small investor, believe.

When these big investors talk about protection, it doesn’t mean that gold is an asset that doesn’t lose value. The meaning of protection for them is the characteristic of negative correlation with other risky assets. Thus, hedging means reducing the overall volatility of the portfolio.

In the other case, that is, in the diversification of country reserves, the objective is to have an additional asset to exchange for cash or another good that is free of embargoes.

The fact is that the movement of gold was against the main factor that justifies its variation. The interest rate variation explains almost all the movement of the precious metal in the last twenty years. Note the graphic above.

The graph shows the evolution of gold prices on the white line. On the orange line, on an inverted scale, there is the evolution of the 10-year US federal government bond interest rate.

As gold is an asset that does not produce cash flow, the opportunity cost of carrying this asset in the portfolio is the interest rate. Therefore, this cost becomes more expensive the higher the interest rates are.

Institutional investors tend to reduce their holdings in gold for diversification when rates rise and up when rates fall. Therefore, the metal usually falls when rates rise and appreciates when rates fall.

At that time, interest rates rose. Thus, gold would be expected to fall. Therefore, be very careful when entering the market now, as you may experience exactly the reversal in demand that I explained above and return to the natural correlation.

So here are two tips. If you want to protect the purchasing power of your equity, forget about gold and invest in a CDB or fixed income with a return of IPCA+6% per year. If you fear a war and want to protect yourself from this event, buy an ETF from armaments and defense companies, for example, the ITA.

The return for investing in gold loses from one CDB to IPCA+6% pa over the last twenty years and should continue to lose over the next 20 years. Also, the return of the ITA (ETF of US defense companies) was twice the return of gold, in the last 17 years.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

Follow and like De Grão em Grão on social networks. Follow the investment lessons in Instagram.

PRESENT LINK: Did you like this text? Subscriber can release five free hits of any link per day. Just click the blue F below.