This week, the gold price topped $2,000 for the first time in history. In 2020, investors seeking a safe haven have smashed the price of gold through 2011’s peak. And they’re showing little sign of stopping.
The extra gold price impetus comes from a number of directions. Firstly from the rising Covid-19 death count, especially in the USA. And then President Trump’s growing anti-China rhetoric. The latter looks likely to lead to further economic tension between the two superpowers. And the world economy is already bad enough as it is.
Here in the UK, the Bank of England now reckons the pandemic-led recession is going to be less severe than predicted. The BoE thinks we’ll see a 9.5% economic shrinkage, down from earlier fears of a 14% crash. But before we toss our hats in the air and break out the party poppers, that would still be the worst one-year fall in 100 years. And as investors have been increasingly realising, the recovery is going to take longer than early optimists had hoped.
Gold price rising
Those who feared stock prices would fall and expected the gold price to rise have been proved right. So is it time to invest in the shiny stuff now? I think it’s time to do exactly the opposite. If I held any gold I’d be selling it now — and I’d be investing my profit in FTSE 100 shares.
Let’s look back to the July 2011 peak of more than $1,800 per ounce and see what happened next. Over the next few years, the gold price fell. By December 2015, it was down at under $1,100 per ounce. Those who bought at the peak lost 40%.
The middle of 2011 was a turning point for share prices too, but in the opposite direction. In August that year, the FTSE 100 started upwards, and just two years later was up 30%. On top of that, shareholders had dividends to tuck away too.
The Warren Buffett approach
What would Warren Buffett have done? Writing in Fortune in 2012, while the gold price was still close to that peak, he spoke of gold as being in that class of assets that “will never produce anything, but that are purchased in the buyer’s hope that someone else — who also knows that the assets will be forever unproductive — will pay more for them in the future.”
Buffett estimated that, at the time, if you’d had $9.6trn to invest you could have bought all of the world’s gold. Alternatively, you could have bought “all US cropland (400 million acres with output of about $200bn annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40bn annually).” Oh, and you’d still have had $1trn left for spending money.
In another century, all that farmland and your 16 Exxon Mobils will have generated massive new wealth. But your big lump of gold will still be the same size. And I don’t see the remotest possibility that the gold price will have appreciated anywhere near enough to get close to those productive assets.
Tough decade
Gold is up around 10% since the 2011 peak. But that’s only because of the Covid-19 pandemic. And by comparison, the FTSE 100 has provided about 40% in dividends. Will you buy gold at its current record levels? Or follow Warren Buffett and invest in shares?
