Goldman Sachs say gold is not the optimal store of value
New York (July 6) Goldman Sachs released a report where it recently noted Gold is not an optimal store of value against inflation or deflation. In the banks, insights sections of the consumer and wealth management division, Sharmin Mossavar-Rahmani and her team note the rise of the cryptocurrency industry cannot be ignored.
The team makes a compelling case as the number of cryptocurrencies has increased from about 2,000, with a market capitalization of over $200 billion in late 2017, to over 8,000, with a market capitalization of about $1.6 trillion. For context, the market capitalization of global equities is about $110 trillion, that of the S&P 500 stocks is $35 trillion and that of US Treasuries is $22 trillion.
They have also been crunching the numbers on volume adding, "Reported trading volume in cryptocurrencies, as represented by the two largest cryptocurrencies by market capitalization, has increased sixfold, from an estimated $6.8 billion per day in late 2017 to $48.6 billion per day in May 2021.1".
The research team then goes on the attack against gold Below is an excerpt from the report:
The second Insight, published in January 2010, focused on commodities, specifically oil and gold. Gold was touted as a much-needed asset to hedge against the inflationary impact of loose monetary and fiscal policies after the global financial crisis (GFC) and therefore against the likely debasement of the dollar. The argument for gold in the aftermath of the GFC was identical to the argument for cryptocurrencies (cleverly marketed by some as "digital gold") as a result of the pandemic. We recommended against an allocation to gold, oil or commodities in aggregate, showing that they were not an inflation hedge and that gold was not a store of value. The S&P 500 Index has outperformed gold by 327 percentage points, or 10.7 percentage points annualized, over the past 11.5 years. Adding many have touted holding cryptocurrencies as an alternative to holding gold.
Very interesting stuff from the research team. The paper recognizes that Bitcoin is not perfect too. They spoke about the other side of the coin by saying "We also do not believe that Bitcoin is a long-term store of value or an investable asset class for diversified portfolios, as discussed in the next section of the report. Likewise, we do not believe that gold is an investable asset class as a store of value, so claims that Bitcoin is "digital gold" do not confer any value to Bitcoin.".
Goldman then goes on to say "The frequency and magnitude of Bitcoin price declines are too high to provide the peace of mind that a store of value should provide.".
Back to the main "Kitco" take away from the report. The Investment Strategy Group, believe that gold is not a long-term store of value, for the following reasons:
The state, since the inception of pricing data, gold has provided an annualized real return of 1%, barely outperforming inflation. Adjusting for storage and insurance costs, the estimated excess return drops to zero.
Secondly, the only asset class that hedges inflation on a consistent and reliable basis is US equities. As US equities have outperformed inflation 100% of the time over any 19-year window. Gold outperforms inflation only about 50% of the time over a 19- year window. So owning US equities is a better long-term inflation hedge.
Lastly, On a shorter-term basis, US equities have outperformed gold in most periods of positive inflation, as shown. Even when inflation was greater than 6%, gold outperformed only between January 1970 and June 1970, and again between August 1973 and July 1982.
There is clearly room for both in your portfolio. Gold is a real hard tangible asset and cryptocurrencies are digitally made. The whole point of gold is to be a safe haven as a famous man once said "Gold is money Everything else is credit." -- J.P. Morgan, 1912.
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