Investors Ignore Gold at Their Peril
Recently I was struck by a multipage ad that Vanguard ran in The New York Times. It stretched across four full pages. If you read The Times, you couldn’t miss it. Vanguard is the country’s second-largest asset manager and the largest holder of mutual funds. If you want a window into the kind of advice investors are getting from professionals in the business, Vanguard is as good a place to start as any.
And what it shows is that the financial sector has missed or misread the most important investment message of the past 20 years. Even worse, it’s still steering investors in the wrong direction for the next 20 years.
In the paragraph that most stood out for me, Vanguard recommended that investors rely on its “construction process” to create a portfolio built around a diversified mix of equities and bonds. Factors to weigh when creating such a portfolio included ability to tolerate risk, time horizons, need for retirement income, and so on.
A Striking Omission
This might sound perfectly normal and unremarkable. There is no problem with diversification. It’s in fact a good idea. But my problem with Vangard’s approach is that it left out any reference to commodities, and in particular to gold.
That kind of approach totally ignores that over the past 20 years, gold has been the top-performing asset, far outstripping stocks and bonds. Looking just at this past year, gold has continued to handily outperform the S&P 500.
And most pertinent of all is that you can expect gold to be the biggest winner over the next 20 years.
A Changed World
Before this century, for most of the postwar period, focusing on a combination of stocks and bonds made sense. Stocks provided solid gains while bonds returned less but provided loads of downside protection when stocks faltered. But as the 21st century got underway, the era of stocks and bonds came to a halt. Most investment firms, however, have remained rooted in the past, failing to adjust to radical changes in the world that make gold the most essential investment to own.
The table presents some pertinent data. It compares the growth rate of high-income countries (for which the OECD can be a reasonable proxy) with that of developing economies over more than 50 years.
Source: The Complete Investor
As you can see, prior to the 21st century high-income countries racked up faster growth. The big got ever bigger while the small got smaller. And the very smallest, well, they starved. What was good for just 15% or so of the world in terms of population was rotten for everyone else. The disparity was so great that per-capita gross domestic product (GDP) of the rich was more than 20 times higher than for the rest.
But that changed. China was the catalyst, exploding onto the scene after joining the World Trade Organization at the end of 2001. As growth in China surged, many other developing nations followed along. By the time the current decade began, the gap in per-capita GDP had narrowed to where high-income countries were nine times, not 20 times, wealthier than the world’s have-nots. Better, but still a long way to go.
Services and GDP
What does this mean for investors and for gold? Everything. A key distinction between developed and developing countries is their differing levels of demand for commodities. Developing economies require a lot more commodities per capita to generate the growth needed to raise their living standards.
Developed economies are primarily services-driven. In 2019, about 70% of GDP in developed countries came from services compared to 55% for developing economies. A generation earlier, at the start of this century, the percentages were 65% for developed countries, 45% for developing countries.
A good proxy for commodity needs is per-capita energy use. As long as a country is developing and has a relatively small service sector, its growth will require rising energy usage. Readily available data show that 67% is, roughly speaking, the magic cut-off number. Once a country’s service sector reaches 67% of GDP, per-capita need for energy, and commodities overall, starts to decline.
With the service sector in the developing world now accounting for 55% of GDP, there are 12 percentage points more to go to get to the magic 67% level. It took 20 years for the figure to climb 10 percentage points, from 45% to 55%. This suggests we likely face at least another 20 years during which per-capita demand for commodities from developing countries will be rising.
How Gold Fits In
Inevitably this will lead to commodity scarcities and rising commodity prices. Add to this the push to transition to renewables for reasons related to climate concerns. And then realize that the drive for commodities we’ve already experienced has reduced reserves for many critical commodities such as copper, and it should seem obvious that the world is facing at least two decades of pressure on commodities.
When commodities rise, gold rises faster. The reason is that gold is simultaneously a currency and commodity. Gold outperformed the S&P 500 by 200 percentage points during the 2000 to 2019 period and outperformed bonds by more than 250 percentage points. There are no reasons to think these dynamics will change.
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