Gold is generally regarded as an excellent asset for hedging against inflation and risks, with low volatility. However, if we look at the price trend of gold since 1975, we will find that although gold has a long-term upward trend, it also experiences significant fluctuations in between, making it less safe compared to regular stocks. For example, between 1980 and 2001, gold experienced a cumulative decline of 70% over a 20-year period. If you enter the market at the wrong time, your assets can suffer significant losses. From the end of 2011 to the end of 2015, the decline in gold prices also reached 45%. Overall, the inflation-resistant effect of gold only takes effect when the time period is very long. In other words, the short-term inflation resistance of gold still remains questionable.
Furthermore, according to data from the World Gold Council website, the annualized volatility of gold over the past 50 years is 19.4%, which means that gold on average rises or falls by nearly 20% each year. This is higher than the annualized volatility of the MSCI Emerging Markets Index, Bloomberg Commodity Index, and even the S&P 500, which is 15%.
In terms of hedging, the price trends of gold and stocks do show a long-term inverse relationship, indicating a hedging effect. However, in the short term, there is sometimes a positive correlation and sometimes a negative correlation, without a very clear trend.
As for the reason why gold also has high volatility, according to a recent video analysis by Lin (a well-known financial YouTuber), there are two possible reasons that may influence gold prices in the short to medium term:
1. “Pure Love” for gold: Whether it is due to historical reasons, social environment, family inheritance, or attractive appearance, all of these belong to this category, reflecting the preference of the general public (aka retail investors) for gold. This preference that most retail investors have can be “triggered,” and when the “love” for gold switches between being triggered or not being triggered, it can lead to significant fluctuations in gold prices. The presence of many retail investors in the gold investment market also contributes to the second hidden demand.
2. Speculation: Many people hope to make short-term profits through buying and selling gold, especially in speculative markets dominated by retail investors, where the “chasing high and selling low” behavior is particularly evident. This is reflected in higher volatility in gold prices.
These two hidden demands cause gold prices to have unpredictable price fluctuations, which are referred to as “noise” in investments. In conclusion, Lin states that gold prices can be influenced by various factors, making it difficult to predict.
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