TLDR;
This video explores the historical performance of gold in both USD and INR, arguing against the common dismissal of gold as a mere "pet rock". It highlights gold's potential as a risk diversifier and asset allocation tool, especially during times of economic uncertainty and currency devaluation. The analysis covers significant periods from 1970 to the present, noting the factors driving gold prices and the increasing interest from central banks.
- Gold has historically outperformed many asset classes, especially during economic uncertainty.
- Central banks are increasingly acquiring gold, signalling a shift away from reliance on the US dollar.
- Investors should consider a significant allocation to gold as part of a diversified portfolio.
Introduction [0:01]
The video introduces the topic of gold investment, clarifying that it will present a case for gold, contrary to any initial clickbait suggesting otherwise. The discussion will cover historical gold rallies, performance in USD and INR, and drawdowns following peaks, examining gold's performance from 1970 onwards. The speaker, a long-time gold investor, criticises financial analysts for undervaluing gold as a risk diversifier and asset allocation tool, pointing out the contradiction in dismissing gold while central banks actively increase their gold reserves.
Gold's Performance History [2:13]
The analysis begins in 1970, focusing on 15 August 1971, when the US dollar was decoupled from gold. Before this, the dollar was backed by gold at a fixed rate of $35 per ounce, allowing countries to exchange dollar reserves for gold. However, the US misused this privilege by overspending during the Vietnam War, leading countries like France and the UK to demand their gold back. President Nixon then declared that the dollar would no longer be convertible to gold, though it would remain backed by gold temporarily. The market's disbelief led to gold prices soaring from $35 to $800 within nine years.
Central Bank Selling and Subsequent Rally [4:33]
From 1980 onwards, several European nations, including the UK, Switzerland, and Canada, sold off their gold reserves, contributing to a bear market that lasted until 2000. This selling was coordinated under an agreement limiting annual sales. Post-dot-com crisis, a renewed gold rally began, driven by concerns over fiat money, with prices rising from $200 to nearly $2,000. After a correction, gold reached approximately $3,600.
Phase One: 1970-1974 [5:34]
Between January 1970 and October 1974, gold prices increased by 456%, with an annual growth rate of 43%. This surge coincided with the end of the Bretton Woods system, dollar devaluation, spiking inflation, and the oil crisis, which caused double-digit inflation in the US. The loss of confidence in the USD boosted hard assets, a situation comparable to current market conditions.
Phase Two: 1976-1980 [6:28]
Following a 48% drawdown over 20 months, another bull rally occurred from October 1976 to January 1980, with gold prices rising from $100 to $800. During this period, US gold increased by 621%, while Indian gold (INR) rose by 560%, resulting in a 77% annual growth rate over four and a half years. This phase was marked by runaway inflation, hitting 15% in the US, an oil shock, geopolitical tensions (Iran revolution, Cold War), and a sliding USD, making gold a key hedge.
Drawdown and Recovery [7:46]
Central banks began selling their gold reserves, leading to a 71% drawdown in USD gold, which took 20 years to recover. In rupee terms, the drawdown was 56%, with gold falling from 200 rupees per gram to approximately 100 rupees per gram, taking about 10 years to recover. Despite the US dollar gold taking 29 years to recover, rupee gold clocked 382% growth due to currency devaluation during India's economic reforms.
Phase Three: 2001-2011 [9:11]
From April 2001, following the dot-com crisis, gold rose from $250 to about $2,000 over the next 10 years. In dollar terms, it increased by 592%, and in INR terms, by 573%, both around 20% annually. This was driven by the dot-com bust, a shift from equities to safe havens, Federal Reserve rate cuts due to recession, the 2008 financial crisis, and quantitative easing.
Correction and Recent Performance [10:04]
US dollar gold corrected by about 45% over four years, taking nine years to recover to all-time highs. In rupee terms, it took only six years to reach a new high after a significant run from 350 rupees to 3,200 rupees per gram. Since October 2023, gold has seen another surge, from $2,000 to $2,600. As of the current year, gold is up about 123% in USD and 141% in INR, with annual growth rates of 49% and 55% respectively. The 43% gain in rupee terms this calendar year marks the third-best year for gold since 1973.
Historical Patterns and Current Drivers [12:09]
Historically, significant years for gold tend to occur in clusters, with all-time highs often sustained for several years. The current gold market differs from previous periods due to central banks actively buying gold. While gold may appear overbought on a monthly basis, several factors are driving its price, including a declining US dollar, potentially topping equity markets, and poor bond market returns. Investors are shifting from bonds to gold, and countries are selling treasuries to buy gold. Anticipated policy rate cuts and persistent CPI levels further support gold's rise.
Factors Driving Gold's Resilience [14:14]
Gold's resilience is driven by factors such as balancing out of crypto investments and the geopolitical impact of the Russia-Ukraine conflict. The freezing of Russian assets by Western countries has made nations wary of keeping their gold in Western custody, leading central banks to increase their gold reserves. Central banks, previously buying 200-300 tons per year, are now purchasing around 1,000 tons annually, becoming the biggest buyers in the market.
Structural Shifts and Alternative Reserves [16:38]
Structural shifts in reserves are occurring as countries seek alternatives to US dollar dominance. Gold allocation as a percentage of foreign reserves has surpassed US treasury holdings for the first time since 1996. India, for example, has sold $25 billion of US treasury holdings to move into gold. This trend, if it continues, could significantly impact gold prices due to increased demand and decreased demand for US treasuries, leading to higher yields.
Conclusion and Recommendation [17:36]
The video concludes by emphasising the importance of asset allocation, particularly in gold, and advises against limiting gold investments to small percentages. It recommends consulting a financial advisor and, if necessary, finding one who understands the current need for gold in a diversified portfolio.