Gold is generally considered a valuable asset that can hedge against inflation and provide a safe haven. However, if we look at the price trend of gold from 1975 to the present, we will find that although gold has shown an overall upward trend, it has experienced significant volatility in between and is not as safe as stocks. For example, between 1980 and 2001, gold experienced a cumulative decline of 70% over a period of 20 years. If you enter the market at the wrong time, your assets can suffer losses. From the end of 2011 to the end of 2015, the decline was also as high as 45%. Overall, the inflation-hedging effect of gold only becomes effective when the time period is very long. In other words, there is still a question mark as to whether the short-term inflation-hedging characteristics of gold are strong enough.
Furthermore, according to data from the World Gold Council website, the annualized volatility of gold over the past 50 years is 19.4%, which means that gold has an average annual increase or decrease of nearly 20%. This is higher than the annualized volatility of Morgan Stanley Capital International Emerging Markets Index, Bloomberg Commodity Index, and even the S&P 500, which is 15%.
In terms of hedging, the price trends of gold and stocks do show a long-term inverse relationship and can provide hedging effects. However, in the short term, there is sometimes a positive correlation and sometimes a negative correlation, and there is not a very clear trend.
As for the reasons why gold has high volatility, according to Kobayashi (a well-known financial YouTuber), there are two possible reasons that can influence the short to medium-term price of gold:
1. “Pure Love” for gold: Whether it’s due to historical reasons, social environment, family inheritance, or good appearance, all belong to this category, reflecting the preference of the general public (aka retail investors) for gold. This kind of preference that is common among retail investors can be “triggered”, so when the “love” for gold switches between being triggered and not being triggered, it can lead to significant fluctuations in gold prices. The gold investment market has many retail investors, which also leads to the second hidden demand.
2. Speculation: Many people hope to make short-term profits through buying and selling gold, especially in speculative markets dominated by retail investors, where “chasing highs and selling lows” is particularly prominent. This is reflected in higher volatility in gold prices.
These two hidden demands result in unpredictable price fluctuations in gold, which is referred to as “noise” in investment. In conclusion, according to Kobayashi, gold prices are influenced by these factors, making them difficult to predict.
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