Today’s writing will be about gold. More importantly, is gold a wise investment alternative? Instead of just writing about gold’s performance, I am also going to dabble in a little speculation. This can be a risky subject because I am going to make a prediction based on history. My prediction is strictly for entertainment purposes, please do not use my discoveries as a rational to gamble your hard earned dollar. Only time will tell how my prediction holds up. So I guess we will check back here in a few years and share my discoveries.
The purpose of this post
Education is the focus here. I am writing about gold’s performance over the last 100 years. The idea behind this post is to get us thinking about non-traditional ways of investing. Yes, investing in the Stock Market is generally a wise move. I personally have some of my retirement in the Stock Market. But I believe, we are due for another recession soon. I am not saying that the sky is falling. I am just saying that I’d like to study a few alternative investing routes while I watch interest rates increase and try and predict the next dip in the Stock Market.
With regards to alternative investing routes, I do believe most people are blindly contributing to their investment funds and not watching their Stocks diligently. As well as blindly following the advice of rich traders who primarily profit from the fees of managing your money. After all, that is what everyone else does. And I don’t believe you should just blindly follow what everyone else does.
To steal a term from Mark Twain, “Whenever you find yourself on the side of the majority, it is time to reform (or pause and reflect).”
My personal interest in gold is that it gives me a sense of self-reliance in my investing. I know, I know, I could buy the computer software, read all the books and learn how to trade stocks myself. And maybe someday I will get there. But as for now, perhaps gold can help tickle my do-it-yourself investing itch.
A little context
I have always thought about gold and why so many people around me buy into the idea of precious metals as an investment. Aside from circuit boards, to my knowledge, gold really doesn’t provide any intrinsic value. It really is just used as a hedge. By hedge, I mean it’s a way of protecting your wealth from fiscally irresponsible governments.
For example, if I had $1,000.000 US currency in the bank, the value of this money will greatly decrease over time if the government prints more American dollars. This is because the more money the government prints, the less our US dollar is worth. This is a simplified explanation of a term called “inflation”. (A future post will discuss inflation in detail). Gold could, in theory, protect me from an irresponsible government printing more money. This is because instead of depositing my $1,000.000 in the bank, if I purchased gold, I could then exchange the gold for a foreign currency thus maintaining the value of my original $1,000.000. More or less, every country in the world will exchange gold for their currency in some manner.
This got me thinking. More or less, since I have been alive, every 8 years the political power shifts in the White house. Do gold prices follow this shift? If so, why would I wait till an election to buy gold? At this current moment in time, we have a relatively strong economy from a Stock Market perspective and a president who is fresh into his term. So what are gold prices right now? If gold prices are low, it would be tempting to buy it now with the intention of selling for a profit at the end of this presidents term when I suspect a left-wing candidate would get elected.
Looking at the 2008 to 2017 timeline, there is a gold trend that could be based on what happened in the White House. As you can see on the highlighted portions of the screenshot back in 2008, gold prices started to climb to a historic high when a Democrat became president. All throughout the first four years of the Democratic president, gold prices continued to soar until the re-election of the Candidate. After 2016, prices of gold started to drop. Is this because it was evident that the Republican party was probably going to take the white house? As of now, September 2017, gold prices are relatively low. At this particular time, I’m guessing that this trend appears to favor the Republicans due to the reputation they have to normally favor business growth and low taxes.
I am not going to take the stance and say that the Republican party, in particular, is the sole reason for actual economic growth because historically speaking that would be inaccurate. Spotting trends are the purpose here not partisan politics. But generally speaking, the perception some candidates have could influence consumer confidence in the market during election cycles.
Another key thing to note is that since 2008 we have had a slow and steady recovery in the Stock Market (shown below). This recovery could be another reason why gold prices have decreased. Generally speaking, gold values shouldn’t follow the Stock Market they should do the opposite.
2008 – 2017
Whenever there is consumer confidence in the US dollar, gold prices are low. But when the opposite is true, gold prices increase. This leads me to assume that over the last 30 years, Republican candidates have generally brought a level of consumer confidence in the US dollar’s value while the Democrats have had the opposite effect.
So wait a minute… There was a huge spike in gold prices that started back in 2001?
There was no election happening, so I bet you are ready to dismiss my theory. Not. So. Fast. I am saying consumer confidence is what controls the values of gold, not political parties. The 2001 spike in gold was right after the .com bust and the September 11 attacks on the USA. Since the US economy was shaky at this time and scared from the aftershock of the attacks it’s only natural to invest in gold as a hedge. So far, this proves my theory. One point for me. Now let’s go back in time a little and talk about what was gold doing throughout the 1900s.
The performance of Gold over a 100-year span
Now that you have the basic concept of my claim understood, let’s see if my thesis holds over time.
I will do my best to explain the history in context to the best of my ability. Also, similar to the 2001 climb in gold prices, certain events can take place outside of political elections and cause gold prices to climb. Let’s see what happens. I plan to just explain the big spikes and dips with some commentary along the way and go backward in time.
As you can see these were the good years for the American economy. We had fiscal responsibility a balanced budget, inflation was steady, President Bill Clinton and the Republican house legislator had high approval ratings. Due to those accolades just mentioned, confidence in the economy was at an all-time high thus gold prices were low. I say that this is counter to my theory on Democrats in the white house, but gold prices still fell even lower immediately after a Republican got in office.
This timeline is very interesting indeed. This is because back in 1987 we had a recession called black Monday. Looking at the chart you can see that gold prices dropped with the stock market. That is counter to my theory on gold prices increasing with the consumer confidence decreasing.
So why did gold drop in value at this time?
Well, there are a few schools of thought. First, there is the claim that gold’s value boomed over 2300% in the 1970s and was simply correcting itself throughout the 1980s.
Note that this is the first time we have noticed gold prices drop along with the stock market. As you study the chart from 1987-2000, notice that gold prices continued to drop all throughout the 1990s. What was going on with the Stock Market at this time?
- Aside from the 1987 crash mentioned earlier, the Stock Market exploded with growth all throughout the 1980s.
- The President had high approval ratings throughout this decade due to high economic growth and low inflation.
- Mentioned earlier, the gold value decrease could have also been normalizing from their inflated values in the 1970s.
Long story short, the 1980s brought a high level of consumer confidence due to the growth in the economy thus there really wasn’t a reason to invest in gold since the threats were low.
- Inflation was abnormally high.
- Unemployment was abnormally high.
- The US President had to resign for corruption.
- The US Dollar was officially converted into a full Fiat currency.
Here is an interesting observation from ARKADIUSZ SIEROŃ
“The next presidential term was even better for gold, which skyrocketed 392.50 percent under Jimmy Carter (D) in 1977-1980 due to the rampant inflation and weak greenback. Carter was definitely the best president for the price of gold.”
My opinion: Confidence in the US economy was at an all-time low due to these reasons.
I am going to admit, this chart really looks bad for Gold. However, take a second and examine the high starting at 1934. Up until the 1970s, that peak has been the largest rise in value of the 1900s. So before digging into history, I immediately thought that this was just normalization due to an inflated value like what had happened in the 1980s. Another interesting observation is that Gold did not increase in value once the US entered WW2? I assume the general population at the time had 100% confidence in the Military’s competence. In addition, since this was a time of extreme manufacturing for Tanks, Airplanes, bridges etc, this further proves that Gold doesn’t have any intrinsic value aside from its ability to trade currency. Otherwise, demand thus value would have increased at this time.
So this is a larger than average time span here are a few bullet points that make me feel why there was a decrease in gold prices.
- After WW2, the US replaced the UK as the worlds superpower. This meant that the US became the police of all trade across the sea and played a large role in the rehabilitation of the Pacific East orient countries, (China, Japan, Korea etc).
- At this time, the US currency was backed by gold and the US had plenty of it. Surplus inventory always diminishes value.
Since the USA was doing so well I’d assume the Stock Market would also reflect this newly achieved global status let’s take a look.
I stand corrected in my assumption. As you can see, the Stock Market boomed at this time. Overall, the Stock Market exceeded the climb it had during the Roaring 20s.
As a reminder, the US dollar was backed by Gold at this time. Shortly after the Federal Reserve raised interest rates back in 1929, a recession began. In this same year, the Stock Market crashed and many investors started redeeming paper currency for its value in gold. By 1932, speculators again turned in money for gold. As gold prices rose, people hoarded it, driving prices up even higher.
Aside from the increased demand for gold,
- high unemployment
- high inflation
- low consumer confidence in a recovery.
As you may have noticed, these are all a perfect recipe for soaring gold prices.
Precious Metals compared to the Stock Market
- In most cases, the gold price rose during the biggest stock market crashes.
- Gold’s only significant selloff (-46% in the early 1980s) occurred just after its biggest bull market in modern history.
- You’ll recall that gold did fall in the initial shock of the 2008 financial crisis. This is perhaps why many investors think gold will drop when the stock market does. But while the S&P continued to decline, gold rebounded and ended the year up 5.5%. Over the total 18-month stock market selloff, gold rose over 25%.
Do Presidential Elections affect Gold values?
(Dems in blue and Republicans in red)
- Gold Values have dropped following elections from the years of 1916, 1980, 1988, 1992, 1996, 2000, 2004, and 2016.
- Gold Spiked following the election years of, 1920, 1932, 1972, 2008, 2012
Since the 1980s with the exception of one guy (Bill Clinton), gold prices have increased with the Democrats and then they Decreased under the Republicans.
Going out further than 35 years, it’s kind of a crap shoot. However, I would argue, the Democratic and Republican parties of today are very different than that of the 100-50 years ago. I would also argue, the Democrat in the 1990s had a fiscally sound platform which is also counter to that modern day Democrats. So my theory stated above is only accurate the majority of the time if you go back 30 years. Long story short, I wouldn’t gamble on my theory of Dems increasing Gold’s value while having the opposite effect for the Republicans.
If it looks like the current president will get re-elected and runs on a business-friendly low-tax agenda, gold prices will likely decrease. On the other hand, if for whatever reason it looks like a Democrat will win the White House in 2020, gold prices will climb if the candidate runs on a high tax platform (which they’ve touted in modern times).
What could change my prediction is if the Democrats run on a platform of economic growth, fiscal responsibility, and low taxes (see 1996-2000 screenshot).
Only time will tell if am psychic. After the 2020 elections, I will do a follow-up on this post to help us learn from the market. I hope you found this post informative. Please share your predictions based off of history so we can all learn together.
Will I personally invest in gold?
Well, I don’t think gold is a long-term sustainable investment strategy. This is because, if you examine the times where gold’s value has risen, it’s primarily been based on fear while the publicly traded companies in the Stock Market rise in value normally because they are creating things that people use. That being said, I do plan on allocating $1000 this year and maybe next year on gold. I plan on speculating a little. I will sell when gold’s value spikes and I will report back on what events led me to sell.
Thanks for reading!
This has been another entry in my investing series where I share first hand experience on strategies for wealth generation that I actually use.