Why We’re Bullish on Gold

By datatrekresearch in Blog

DataTrek co-founder Nick Colas shares his outlook on gold in the latest video on our YouTube channel. This discussion includes the process behind how he values the yellow metal, its relationship to equities and why he’s bullish. You can watch it here, and read the transcript from the video below:

Transcript:

Hi, Nicholas, from DataTrek here. And today's video is about how to think about the value of gold, the price of gold.

And I'd like to start with a personal story about this topic, actually, my family's originally from Cuba, and came here in 1960, just after the revolution, and because they kind of missed the timing of getting out of the country early, they didn't have any money when they came here, they were quite wealthy there. But they basically came here with $200 in the suitcase. And that taught them a big lesson.

After they got back up on their feet, my Dad started buying gold coins, you know, on business trips to Europe mostly. And he'd buy one to three ounces a year that was $35 to $37 an ounce. So it's an affordable purchase for him. And he just wanted a store of value, where if for some reason the US became unstable, which is how refugees think, no place is safe, then he at least would have something to start a new life in another country after that. So he viewed gold as a long term store of value.

Back in the 60s, and the 1970s, the price of gold began to increase pretty quickly because a couple of things. The first was in 1971, President Nixon took the US dollar off the gold standard, and prices began to rise. And then in 1974, it became legal for US citizens to buy gold coins and gold bullion for investment purposes. Again, it had been illegal since 1933. So demand grows even more. And then in the late 70s, inflation really took over as a big investment theme. And the price of gold went up even further because gold was used as an inflation hedge.

So gold went from $35 when my dad was buying it in the 1960s to $600 an ounce in 1980. And that was just about the time I was going to college. So my dad was able to pay for my entire college education with some of the gold that he had stacked over the course of the prior 20 years, when prices were extremely low. And I got to go to college without any kind of student debt, which was fantastic. Gold helped me do that.

So I think about gold prices a lot and what makes people interested in gold. And I think my Dad's experience is fairly emblematic. You don't actually have to be refugee to understand that gold is a store of value. This is actually one of the gold coins that he bought in the early 1980s. And I got to inherit. Now over the last 10 years, gold hasn't done as well, gold's compounded annual return is roughly 5% a year for the last decade. And that's not as good as the S&P. The s&p is up 13% a year over the last decade. So by that measure, gold's not been as good as stocks.

But if you look at stocks outside the US, the story is different. The MSCI All Country X US Index is only compounded at 5% a year for the last decade. MSCI China, Chinese equities have only compounded at 3%. So yes, gold hasn't done as well as the S&P but it has absolutely held its own versus non US equities on a total return basis. So when you think about gold versus stocks, understand that there's more stock markets than just the US. And gold has done reasonably well against stocks outside the US.

Now let's take a step back and talk about where gold supply and demand is right now to kind of start putting this into a useful framework for thinking about gold prices going forward. The data we're going to discuss comes from the World Gold Council which is an excellent website. By the way, if you want to look into this topic more in depth, they have great databases. The supply of gold is roughly 75% from new gold mining coming out of the ground every year, and 25% from recycling, just recycled gold in various forms, jewelry, other things. And that's the supply of gold every year. It's about 4700 metric tons.

The demand for gold comes from three places primarily. First is jewelry demand, that's roughly half of all demand for gold globally. 25% comes from investment demand coins, Bullion ETFs things that people buy to own as an investment. And then 25% comes from central banks, not the US obviously, but non US central banks do buy gold for their reserves. Over the long run over the last 10 years or so, demand for gold across the board has been fairly flat at 4% growth annually a year. However, over the last three, four years all the income and incremental demand for gold has come from central banks, specifically China, Turkey, Russia, and India. They have been big net buyers of gold and you've got to ask yourself why?

Well, I think they see in gold what my dad saw in gold, which is two things. The first is gold is priced in dollars, and the dollar is still the global reserve currency. So you kind of get backdoored dollar exposure when you own gold as a non US holder because you're owning something that is priced in dollars. If you want to buy gold in India or China or Russia. You can show up at local currency, but you have to translate that into gold in dollars in order to buy the gold you want. So owning gold is like owning the dollar plus the volatility of the underlying assets.

The thing that I think is even more important, honestly, is once gold is in a central bank's vault anywhere in the world, again, Russia, China, India, Turkey, it can't be confiscated. This is unlike financial assets, like treasuries, which, as we saw with the Russia situation after the invasion of Ukraine, financial assets can be confiscated. So gold has the benefit of not being able to be confiscated. You know, if there's geopolitical tensions, and that's important to the central banks, you know, because they've seen what happened with Russia, and they're interested in having reserves that are based in dollars, but aren't subject to US sanctions or US confiscation, or, you know, Western confiscation. So those are two important benefits, and then they're not going away anytime soon.

So let's wrap up. The picture for gold over the next couple of years looks pretty good. Honestly, you have underlying decent demand from jewelry demand, as long as the global economy is good. Jewelry demand should be strong. So that'll hold in. And then you have this incremental buying from central banks, which doesn't seem to be going away anytime soon. Now, if you think we're going to have an outbreak of global peace, then gold is probably not a great trade, because central banks will see much less interest and not want to own as much gold. However, the current situation feels quite different. We have geopolitical tensions with Russia, with China. Turkey has its own issues. India is a growth economy and doing pretty well, but it's a very gold based economy. And so they should continue to buy gold as well.

And then you have the whole de dollarization theme. Yes, gold is still priced in dollars so it's not really de-dollarizing the central bank's balance sheet, but it is taking it away from the financial assets side of the dollar and into real assets. So the bottom line is we're pretty bullish on gold for the next five to 10 years. You have good underlying demand and good incremental demand from central banks. And it's also a very good diversifier for global portfolios.

Now, in financial asset portfolios, gold tends to trade differently from stocks and bonds over time, except in the most sort of dire crises when everything just goes down. So it's a good thing to own and we tend to recommend to clients a 3% to 5% position in a big diversified portfolio be in gold.

So that's our take on gold. I hope you found it useful. As always, please like and subscribe if you found this information of use to you. And please do check out datatrekresearch.com for more information about us and our product offerings, thanks very much and have a great day.