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The price of gold rose to more than €59,000 per kilo this week, reaching its highest level since April last year. The price of the precious metal is rising because of a global banking crisis, which is causing investors to move to safe havens. The Gold price In fact, the price is up more than 4% this week, the biggest weekly increase since mid-November and the third week in a row in which the price has risen. Silver is also benefiting from the turmoil in the financial markets, as the price of this precious metal has risen more than 6% this week and stood at €666 per kilo on Friday afternoon. In this way, the precious metals prove their added value in the investment portfolio. Is it still attractive to buy gold?
Gold price to highest level since April 2022
Investors are concerned about the stability of the banking sector, now that three U.S. banks have collapsed in a short period of time and Credit Suisse had to turn to the central bank for liquidity support. The problems at Silicon Valley Bank and Signature Bank exposed the weaknesses in the banking system, especially in the regional banks that have not properly hedged the risk of rising interest rates. U.S. banks with balance sheets of up to $250 billion have been less tightly regulated in recent years, which means that their risk management is not at the same level as that of the larger banks. Silicon Valley Bank proved vulnerable due to its large exposure to the tech sector, while Signature Bank ran into trouble due to exposure to the fallen crypto exchange FTX.
When the Federal Reserve decided to suspend all account holders' assets, guarantee Calm seemed to return, but that was short-lived. At the beginning of this week, Credit Suisse came under a magnifying glass after the US regulator questioned its financial figures. The Swiss bank already lagged behind competitors last year, as it failed to become profitable. While other banks saw their profits rise last year, Credit Suisse continued to make losses quarter after quarter. The bank also suffered billions in losses due to the collapse of hedge fund Archegos and financier Greensill, causing the market to doubt the bank's risk management.
The Swiss central bank has also had to intervene, but the question is whether that will be enough to allay investors' concerns. On Friday afternoon, it subsided Credit Suisse's share by almost 10%, despite the central bank's pledge of 50 billion Swiss francs in liquidity. The optimism in the financial markets was therefore short-lived.
Credit Suisse shares slipped further on Friday, despite liquidity support (Source: Tradingview)
We see more often that people Buy gold in times of crisis. When confidence in money and banks is under pressure, people resort to the tangible value of precious metals. That's how it has been with all unbacked money systems throughout history. Especially in an investment portfolio with different types of investments (such as shares, bonds, real estate and commodities), the precious metal has proven its added value.
A previous analysis The World Gold Council's report shows that the price of gold generally rises on days when stock prices rise sharply, but that gold also rises when stocks fall hard. And with an average return of about 8% over the past fifty years, the precious metal also makes a positive contribution to the increase in value of an investment portfolio.
Gold has a negative correlation with stocks when stock markets are falling (Source: World Gold Council)
In the study, the World Gold Council writes that relatively small investments in gold have been shown to help reduce potential losses, without investors having to sacrifice much expected return. Based on the returns of various investments from January 1987 to July 2010, they calculated the average return, volatility and Value at risk (VAR) for each of the selected portfolios. This research shows that adding gold to a portfolio consistently produces similar expected returns, but with lower volatility.
"We have found that, in general, there are good reasons to add gold to a portfolio. After all, the expected losses decrease without necessarily being at the expense of returns. We now show that, in most periods of financial stress, portfolios with gold outperform portfolios without gold. To this end, we look back at periods, beginning in January 1987, when the financial markets experienced an unexpected and negative shock affecting more than one asset class.
We focus on six such events: 1) the market crash around October 1987, also known as "Black Monday", looking at performance between August 25 and December 12 of that year; 2) the Long-term Capital Management (LTCM) crisis, between 20 July and 26 August 1998; 3) the bursting of the dot-com bubble in the period surrounding the dramatic decline of the NASDAQ index, between March 10, 2000 and April 4, 2001; 17 (4) the terrorist attacks of 11 September 2001, between 24 August and 21 September 2001; (5) the market downturn of 2002, when stocks fell sharply between March and July 2002; and 6) the financial crisis of 2007-2009, also known as the "Great Recession," between October 12, 2007 and March 6, 2009."
A recent publication by analyst Jeremy De Pessemier of the World Gold Council Confirms that adding gold still makes for a better risk-reward ratio. By converting part of the liquid assets into gold, the return of the total portfolio increases. By converting a small part of the equity portfolio to gold, the return remains about the same, but the volatility of the investment portfolio decreases.
As the charts below show, gold is, on average, under-correlated with other investments, such as bonds and stocks. In combination with the historical return of about 8% over the past fifty years, adding gold does not have to be at the expense of returns. Especially in the current time of ongoing geopolitical tensions in the world and a possible escalation of a banking crisis. Buying gold is a simple and effective way to reduce the risk of the investment portfolio and protect assets from financial and geopolitical crises.
Is this also a good time to buy gold? When calm returns to the market, the gold price can take a step back, but if the situation gets further out of hand, the price will continue to rise.
Gold has little correlation with other investments and therefore offers diversification (Source: World Gold Council)
