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Why Consider Gold and Silver

16 December 2020

Whether worn as jewellery or held in investment grade cast bars, minted tablets and/or coins, physical gold and silver are some of the world’s oldest asset classes.
The demand for physical gold and silver as an investment has continued unabated. The factors that have contributed to this demand include:

Capital Growth

As with any investment, one should take a long-term view. For example, since the turn of the century, the price of gold in Australian dollars has risen from $443 per ounce to over $2,439 per ounce by the end of 2020. This is a strong performance, with gold outperforming most traditional assets over the same time period.
This performance is highlighted in the table below, which shows the returns over 1 year, 5 years, 10 years and 15 years for gold and silver in Australian dollars, compared to other more traditional assets such as the stock market, bonds, property and cash.



The above table indicates that over both the short and long term, the returns on gold and silver priced in Australian dollars performs competitively with other asset classes. Returning 9.5% per annum over 15 years, gold has returned more than double the returns posted by cash and property and exceeded the returns on shares and bond.
With historical returns like these, it’s not hard to see why many investors allocate a portion of their investment funds to precious metals.

Low Interest Rates Portfolio Diversification

Investors should heed the adage that you shouldn’t put all of your eggs in the one basket when constructing their investment portfolio. Over the long term, asset classes like equities and bonds have been shown to be great investments, but the importance of diversification is key. Precious metals, and in particular gold, are great diversifiers because they historically tend to rise in value when other assets are falling.
The chart below shows the return of gold and cash when the Australian stock market fell more than 10%.



In periods where the stock market experienced major falls, gold has usually produced positive returns in addition to exceeding those of the traditional safe haven, cash – demonstrating that including gold in your investment portfolio typically helps balance out your investment returns.

Economic Uncertainty & Inflation (Protect against Deflation)

Today, health and life insurance are commonplace. Similarly, gold is an excellent form of “investment portfolio insurance” because of its reputation as a hedge against economic uncertainty and inflation. Historically, gold tends to perform well whenever there are recessions, rising geopolitical tensions, or economic slowdowns and financial market volatility, like the Global Financial Crisis (GFC). Gold also does well during periods of high inflation.
All of these facts lead prudent investors to precious metals. With so many economic risks on the horizon, including escalating global debt levels over $270 trillion, our prediction is that gold will continue to be considered an excellent hedge and will remain a great way to protect wealth.
With interest rates at record lows, and central banks around the world printing money, we are at risk of higher inflation in the coming years. As a hedge against currency devaluation, owning physical gold is an ideal insurance policy.