Gold has been shining with an outstanding performance for quite some time now. The precious metal is also regarded as „crisis protection“. Why gold is nonetheless rather unsuitable for building wealth.
Gold has always exerted a magical fascination over people. Numerous legends surround the precious metal. In ancient Egypt, for example, people were convinced that the „flesh“ of the gods was made of gold. The treasure chamber filled with gold was long a symbol of wealth and power. And the gold rush is a phenomenon that recurs frequently throughout history.
On the capital markets, gold has been shining especially brightly again for a while now. Last year, its price took another enormous leap upwards. There is plenty of speculation about the reasons. Some point to demand from central banks that has risen strikingly since as early as 2022. Last year, the central banks of Poland, Turkey, India and China, among others, were among the most eager buyers. „The fact that some central banks are considerably expanding their gold holdings is probably connected with their wanting to make themselves somewhat more independent of the US dollar,“ explains Arndt Kussmann, Head of Investment Communication and Analysis at quirion and Quirin Privatbank. The sanctions against Russia in the wake of the war in Ukraine and the de facto expropriation of Russia’s dollar currency reserves were a clear reminder that dollar reserves are by no means risk-free.
Speculation on protection
On top of this: strong upward trends feed, to some extent, on themselves. Large price jumps attract investors, and that reinforces the trend. „But speculative money is, as a rule, fickle money, a potential risk factor,“ Kussmann warns.
In doing so, gold currently thrives among many investors precisely on its image as „crisis protection“. And for quite some time now it hasn’t been particularly hard to find potential trouble spots. Whether geopolitical tensions, question marks over economic development or over inflation: there are plenty of risks for the capital markets. But that’s not really so unusual. „Risks can basically always be found,“ Kussmann emphasises. When investing, therefore, the question always arises of how best to optimise the balance between return opportunities and risks.
Whether gold in a portfolio cushions setbacks in other asset classes is doubtful, to say the least. It certainly does not do so reliably. „Sometimes gold has fulfilled this function and sometimes it hasn’t,“ Kussmann notes. „For example, the gold price first lost around 20 percent of its value during the financial crisis in 2008, and only rose again afterwards.“ When it comes to protection against inflation, things look no better. In 2022, when inflation shot up more or less worldwide, the gold price ultimately went nowhere, in fact even dropped more markedly at times. In real terms (after deducting inflation), you also lost money with gold investments in 2022.
Return expectation of zero
Gold generates neither interest nor dividends. For building wealth, however, it weighs even more heavily that there is no economic reason for a rising gold price. Stocks give investors a stake in companies and thus in the economy. The capital is therefore productive – and geared towards growth. „That is the reason why equity markets tend to move upwards over the long term and on average,“ Kussmann emphasises.
Gold lacks this systematic connection with the economy. „Gold therefore, in principle, has a return expectation of zero; the value of gold is based largely on trust,“ Kussmann explains. Scarcity alone is not yet a reason for systematically rising prices. „And if I now think of jewellery or the use of gold in electronics: there I find myself back in the world of companies and equity markets.“
In Kussmann’s view, gold is therefore at best suitable as a small addition to a portfolio, especially since you cannot foresee the phases of outperformance versus equities that certainly do occur. Moreover, the gold price has historically shown very long dry spells time and again, as the price trajectory above illustrates by way of example. „Gold investments are something for those to whom gold’s significance, enduring over centuries, conveys a feeling of security.“ For long-term wealth building, equities are far better suited – provided the portfolio is broadly diversified.
„Individual stocks can fail, and industries and countries can run into economic difficulties even over long periods,“ Kussmann stresses. That the global equity market as a whole would „fail“ over a longer period is, by contrast, hardly conceivable. „With a scientifically diversified portfolio, like our global ETF portfolio, you pursue sensible wealth building while at the same time avoiding unnecessary risks.“
More about our global ETF portfolio can be found here.
