How politics affect the Precious Metals Industry

Ask any investment adviser and they’ll tell you that it’s important to have a “diversified portfolio”. That just means that you shouldn’t put all your investment eggs in one basket. You shouldn’t invest in only one type of asset, whether it be property, shares, fixed interest products, or precious metals like gold.

Spreading your investments around in different assets helps you to minimise your risk if one or more of them experience tough times. The interesting thing about precious metals is that they tend to perform better as an investment when other types of assets aren’t performing as well. That makes them a handy addition to any investment portfolio.

Like any resource, supply and demand play a crucial role in determining what precious metals are worth at any point in time.  Demand for them can be fueled by major political events that happen around the world. Put simply, investors tend to flock to precious metals (especially gold) during times of trouble.

History tells us that the price of gold tends to surge during times of war or when there’s major economic events like the Global Financial Crisis (GFC).

Consider the following facts:

  • The value of gold increased by 25% in the year after the September 11, 2001 terrorist attacks in the United States. It continued to surge for the next decade as the war on terrorism escalated.
  • During the GFC (October 2007 to March 2009), the price of gold also increased by about 25%, while share markets around the world lost a massive amount of value. The Australian shares market, for example, fell by 54% during that period.

Similar trends happened during crises like the OPEC Oil Embargo in the 1970s and the Great Depression of the 1930s. 

So, let’s do some basic maths.

If you had 1 ounce of gold just before the US terrorist attacks in 2001, it was worth about $US276. That same ounce of gold would have been worth $US1,657 when the market peaked in 2012. Even though the market price has dropped since then to about $1,323 today, that’s still an incredible return of 479%!

In other words, your gold investment would have more than quadrupled in value. No other asset class comes anywhere near that return over the same period.

The calculations also paint a great investment picture pre and post-GFC. A pre-GFC gold investment would have almost doubled in value by the time of the most recent market peak five years later in 2012. And even at today’s lower current gold price, you’d still be nearly 60% ahead!

No one can predict the future, but the current price of gold in 2018 is about 25% off its 2012 peak, so the argument could be made that gold is currently undervalued.