Has Gold really been weaker?

Gold. The precious metal perceived by many as a safe store of value.

Why? It’s shiny, desirable (used in jewellery and watches) and rare enough (finite supply and takes time and resources to mine). This favourable demand and supply means it keeps its value.

Yet gold differs from other assets because it doesn't offer a yield (unlike bonds, stocks or property). So it can’t be valued based on the income you receive.

It's really a physical asset whose value is derived by what people perceive its value to be.

This means gold exhibits some interesting behaviours.

First, it tends to do well during periods of stress. As people lose faith in markets or the system, they retreat to safe havens. And gold is, in many ways, perceived as the ultimate safe haven.

Second, gold tends to do well during periods of higher inflation because it's seen as an alternative to fiat currency. During periods of high inflation, the purchasing power of one's money falls - reducing it's real world value. Gold is seen as a credible alternative that holds it's value.

The chart below shows gold (blue) rising strongly together with US inflation (orange).

But Gold has fallen to around $1800 in May after reaching close to $2000. This means Gold now has a negative return over the past 12 months.

Why has Gold been weaker?

First, Gold is typically quoted in US Dollars. Think of it like a currency pair. If the US Dollar is strong, it’s harder for Gold to outperform and vice versa.

The chart below shows this relationship. Since the start of the year, Gold (blue) has faced pressure as the US Dollar (Orange) has steeply appreciated, aided by the Fed’s intention to aggressively increase interest rates.

So on a 12 month basis, Gold is now slightly negative, while the US Dollar has rallied 15%.

What happens if we translate the gold price into other currencies?

The chart below shows Gold has held up pretty well in Euros (blue) and Pound Sterling (orange). ?Over 12 months, Gold in Euros and Pounds are up about 15%, while Gold in US Dollars is down slightly.

So what’s the takeaway? 2 things:

First, Gold is still a good store of value in inflationary times and a safe haven during periods of stress.

Second, Gold needs to be looked at as a form of currency. Gold may have been weaker in US Dollar terms, but it’s done well when mapped to other currencies.

So good news for investors in Europe, UK and elsewhere. If you are US based, I’d argue the US Dollar is an even better store of value during volatile times – at least nowadays.

For me, I like Gold. It’s pretty, scarce and forms a nice part of one’s portfolio, especially during periods of high inflation. It’s just it's difficult for it to outperform against the Dollar.

And if you measure your performance in the greenback, you may want to take that into consideration.