So, now is not the time to be buying either equities or bonds. Cash then would be obvious and safest to hold. But in what currency? Again, the US dollar is the traditional safe haven. But what we saw over the past week is the US dollar falling against major currencies like the yen and euro. The US Dollar Index is now hovering at the lowest since early 2022, weighed down by capital outflows with the selloff in US equities and UST. The trade war Trump unleashed on the world has dented confidence in the greenback. Unpredictable currency movements are compounding the difficulties in investing into bonds. As we wrote (in our recent article, “Explaining the maths behind ‘terming out’”, April 7, 2024) if one expects the US dollar to fall in the longer term, then bond yields must rise — and therefore, prices must fall (yields and prices move in opposite directions). We will write more on all the above investment assets in the coming weeks. But for this week, we will focus on the one asset that has defied the other tumbling markets. Gold.
Gold prices were up 32% in 2024 and have risen further by another 25% so far this year (at the point of writing) — significantly outperforming the S&P 500 index, which gained 23% in 2024 and is down 10% year to date. Such outperformance is atypical. Over the past half-century, gold has increased just 13-fold compared to the S&P 500 index, which has gained 84-fold.
Last week, gold hit a fresh record, breaching US$3,200 ($4,211) an ounce — blowing past most forecasts and resulting in a rush of analysts upping their price outlooks. Is gold then the hedge in this time of great “unknowns”? After all, gold has been the reliable store of value for thousands of years. Is the current gold rally sustainable? Or has the precious, yellow metal become “overvalued” and therefore, risky?
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Gold has deep cultural significance, and is a symbol of wealth, status and luck across societies
According to the World Gold Council, nearly half of all gold produced is used in jewellery. India and China are the two largest consumer markets for gold in the world. Gold in Indian culture symbolises purity, prosperity and divine blessings, making gold jewellery a fitting choice for weddings, which are considered sacred beginnings. In China, gold has long symbolised wealth and status, where it is commonly gifted during weddings, births and other major life events. Beyond its aesthetic appeal, gold jewellery serves a practical economic function — it represents a tangible form of savings. Families often pass down gold ornaments across generations, treating them as tangible assets that can be liquidated in times of need.
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Gold as an investment asset
Other than jewellery, gold is also held in bars and coins, which are comparatively more efficient as an investment asset. Their prices more closely track spot gold, primarily due to reduced design and craftsmanship costs. Additionally, their standardised sizes make them easier to price and trade. Demand for gold for investment is driven by several factors.
One, gold is a hedge against currency devaluation and inflation. Over the past 50 years, while the US Consumer Price Index has increased roughly fivefold, gold prices have surged by more than 13 times — a strong testament to gold’s effectiveness as an inflation hedge.
But gold has zero yield. That is, it does not generate income such as interest, dividends or rent. Put in another way, there is an opportunity cost to holding gold. For example, you could place the money in a bank deposit and earn interest income. As such, gold’s appeal increases when the opportunity cost of holding it, that is, interest rate, falls. And especially when real interest rate (real yield) — interest rate less inflation expectations — falls. This is the reason why gold tends to outperform during periods of elevated inflation, when nominal returns are eroded resulting in diminished real yields. Conversely, when real yields climb, income-generating investments such as bonds or equities become more appealing due to their ability to compound returns over time.
This relationship is evident when comparing the 10-year US Treasury Inflation-Protected Securities (TIPS) yield against gold prices. Unlike conventional Treasury bonds, TIPS are engineered to protect against inflation by adjusting both principal and interest payments based on CPI fluctuations. Consequently, the yield on a 10-year TIPS reflects the true, inflation-adjusted return — or real yield — an investor can expect over a decade when holding the bond to maturity. Chart 2 illustrates how gold prices rallied during periods of falling real yield and declined when real yields increased.
For the better part of the past several decades, inflation was in secular decline. And one of the reasons, we believe, that is driving gold prices today is the reversal of this secular trend since the Covid-19 pandemic — and with deglobalisation, the growing expectations of higher inflation. Tariffs and trade war will raise prices. As inflation expectations rise, the real yield — or the opportunity cost of holding gold — falls. Gold prices go up.
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While gold has underperformed the S&P 500 index over the last 50 years, they did outperform for short periods of times, during crises. The GFC (2008-2009), the Covid-19 pandemic (2020), the Russia-Ukraine war (2022) and now, the US-China trade war. This brings us to the next key driver for gold demand — fear.
Gold tends to outperform other assets during periods of heightened economic, financial and geopolitical uncertainties. Gold is a safe-haven asset with zero default risk. Unlike fiat currencies or equities, gold exists independent of any single government or financial system, making it inherently more resilient when traditional markets falter. During crises, investors prioritise capital preservation over returns, and gold’s established role as a store of value makes it the natural choice as investors become more risk averse.
The World Uncertainty Index (WUI) is a metric that quantifies uncertainty by analysing the frequency of the word “uncertainty” and its variants in Economist Intelligence Unit country reports. Chart 3 shows the positive correlation between gold prices and the WUI.
How to invest in gold
The traditional way is to buy gold jewellery — whether for cultural significance, aesthetics or a form of savings and store of value. In more recent years, gold in the form of bars and coins for investment purposes has gained popularity, as a hedge against inflation and economic-political uncertainties. Case in point, gold as an investment has been very popular in China, and especially among younger Chinese, in the aftermath of the property market collapse, lacklustre stock market and economic uncertainties. Gold beans — small, pill-sized pieces of gold weighing approximately one gram — are affordable as a form of micro-saving. In 2024, 21% of global gold stocks were held as bars, coins and such, up from 17% in 2010. During this same period, gold held in jewellery declined from 50% to 45%. Together, jewellery, bars and coins constituted approximately 66% of global gold holdings. Of the remaining balance of all gold ever mined, 17% are held by central banks around the world as a reserve asset.
Aside from buying gold physically — whether in the form of jewellery, bars, coins or beans — an investor can also buy exchange-traded funds (ETF) that are backed by gold. Gold-backed ETFs are cost-effective, and buyers avoid the storage and security issues related to keeping physical gold. One could also gain an exposure to gold prices by purchasing individual gold miner stocks or ETFs for gold miners (that track prices for a basket of gold miner stocks). We compiled several of the largest and most popular gold and gold miners ETFs in Table 1.
Investing in gold miners offers leverage to the price of gold — due to their operating cost structures and price-earnings valuation multiples — but at higher risks. For instance, there are idiosyncratic risks that affect the operational and stock performances of individual miners differently such as production costs, geographical exposure and country risks. Gold-backed ETFs, on the other hand, simply track the price of gold.
Chart 4 compares the performance of one of the gold ETFs, GLDM, and gold miner ETFs, the GDX (VanEck Gold Miner), since 2008. GLDM has outperformed for the better part of the last 17 years. This could be due, in part, to the idiosyncratic risks that we mentioned above, which affected the performances of individual companies in the ETF basket. Given the current volatility in equities, investing in gold ETF at this point, we think, would be the safer bet.
Gold as reserve asset
Aside from retail investors, gold demand and prices are also being driven by central bank purchases, most notably China. The country has been actively diversifying away from US dollar exposure while strategically increasing its gold reserves. The nation’s gold holdings have more than doubled from 1,054 tonnes in 2010 to 2,280 tonnes in 2024, while simultaneously reducing its US Treasury holdings from US$1,160 billion to US$759 billion during the same period. Notably, there was a sharp increase in buying since 2022.
After Russia invaded Ukraine, the US took unprecedented steps to impose sanctions on Russia, including the weaponisation of the US dollar. The US and its allies froze hundreds of billions of dollars of Russia’s foreign currency reserves held in Western financial institutions. And they cut Russia off from SWIFT (Society for Worldwide Interbank Financial Telecommunication), isolating the country from the global financial system. These actions served as a stark reminder to central banks worldwide that foreign reserves held in US dollars are vulnerable to geopolitics. This has accelerated de-dollarisation and the shift away from the US dollar and US dollar-based financial infrastructure.
Central banks have dramatically increased their gold acquisitions since 2022, consistently purchasing more than 1,000 tonnes annually — double their annual acquisitions between 2010 and 2019. We believe this trend will persist. For instance, China’s gold reserve — valued at US$191 billion in 2024 — currently represents just 5.5% of total foreign reserves, suggesting considerable room for further expansion as US-China decoupling accelerates.
Is there an intrinsic value for gold?
Clearly, the confluence of the above factors — heightened economic, financial and geopolitical uncertainties, trade war, rising risks of inflation and falling real yields as well as slower economic growth (and in the worst-case, stagflation, which is the combination of high inflation and recession), and the weaponisation of, and weaker confidence in, the US dollar — are driving up gold demand and prices. There is momentum behind this upward price trend. But is it sustainable?
Gold does NOT have an intrinsic value like bonds and equities, assets that generate cash flows. Its demand and price is driven only by what people are willing to pay based on expectations of interest rates, inflation, currency, geopolitics — that is, as a hedge.
But there are two possible methods to estimate “fair value”. Why is this relevant? Because the higher the price deviates from “fair value”, the higher the risk of losses should prices “correct”.
One, real interest rates. Gold prices rise when real interest rates fall, much like equities where stock prices rise when interest rates fall. But are there matching principles to value gold, to determine when the rise (or fall) becomes excessive?
For equities, you can determine fair value based on future cash flows. (We have written extensively on this subject in many of our previous articles such as “A PE ratio of 9 or 229 times says nothing about relative valuations” in The Edge, January 8, 2018.) Gold, however, has no future cash flows, making it difficult, if not impossible to value.
Two, monetary base versus gold reserves (as some kind of shadow gold price). Gold is a monetary asset, a store of value, not a productive asset. There is no fundamental in terms of the returns on investments that generate future profits or cash flows like stocks. Gold value is driven only by psychology and macroeconomic forces.
We will be the first to admit the weakness of any fundamental theory behind what we are proposing. But we think it is a reasonable approximation to how one could value gold — as a “monetary phenomenon”. That is, gold is seen as money rather than commodity, as a measure of purchasing power, a thermometer for the credibility and stability of fiat currency.
The Quantity Theory of Money by Milton Friedman asserts that “inflation is always and everywhere a monetary phenomenon”. Meaning prices rise primarily because of excessive growth of money supply (assuming constant velocity of money and real output, which of course are not constant in the real world. But they can be estimated).
Applying this principle to gold.
- Gold as a “shadow currency”. Gold is often seen as money (a store of value) rather than a commodity. Therefore, if fiat currencies lose purchasing power due to monetary expansion, people seek alternatives, gold being a major contender. So, if money supply grows faster than real output, assuming little change in velocity of money, it leads to inflation. And as we said earlier, gold price rises as a hedge.
- Gold price as a reflection of fiat money debasement. Again, Friedman’s view is if central banks print excessively, they cause inflation. Gold has a relatively fixed supply. Therefore, gold prices will rise — reflecting the falling value of money, that is, a monetary phenomenon.
The above is supported by historical evidence. From the 1970s, after the US dropped the gold standard and ran loose monetary policy, inflation surged, and so did gold prices. Similarly, during the QE (quantitative easing) periods post-2008 and during the Covid-19 pandemic, gold prices rose in tandem with money supply expansion.
In conclusion, gold prices reflect expectations about inflation, which are linked to monetary policy and money supply growth. We argue that it is possible to see gold as a thermometer for the credibility and stability of fiat currency, as explained by Friedman’s theory. And as a thermometer, it does indicate when it gets “too hot” or “too cold”.
Let’s now look at Chart 5, which tracks changes in global broad money supply (after the end of the Bretton Woods system in 1971) against both gold prices and the aggregate value of gold holdings (calculated by multiplying price by total gold held). And voila, gold prices move broadly in tandem with money supply growth, except during times of elevated inflation and crisis.
As a thermometer, it is also warning that the current gold price is “too hot”.
Yes, at times of excessive uncertainties and fear, demand may well continue to rise — pushing gold prices even higher, especially since production is limited (inelastic supply). But so too the downside risks, as gold prices move further and further from the long-term trend to global money supply. We bought the gold ETF, GLDM for our Absolute Returns Portfolio back in March 2025 — and we are NOT adding to it.
If, however, you are still inclined to chase this gold rally, we would advise you to buy the gold-backed ETFs rather than physical gold (coins, beans and so on). Why? Because of the premium charged by most retailers for manufacturing, distribution and dealer margins. Chart 6 shows a sample of current retail gold prices, averaging RM560 per gram versus spot price of RM460 per gram. Selling the physical gold back to these retailers will also entail a big discount to spot prices. In other words, gold prices would have to appreciate by a lot more for one to make any gain. Buying gold-backed ETFs is a lot more cost efficient (minimal premium over spot prices). If affordability is a concern, the smallest amount one can invest in ETF is even lower — for example, one lot of GLDM will cost less than RM300 (including transaction fees). And why not gold miners? The higher leverage implied in investing in miners versus gold ETFs at a time of elevated risks simply means taking on even more excessive risks.
The Malaysian Portfolio gained 1.3% for the week ended April 15, recouping some lost ground from the previous week. Insas Bhd – Warrants C (+25.0%), Kim Loong Resources (+7.0%) and United Plantations (+4.7%) all finished higher. Total portfolio returns now stand at 184.1% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 18.8% over the same period, by a long, long way.
The Absolute Returns Portfolio gained 0.5% for the week, lifting total returns since inception to 19.0%. The top three gainers were SPDR Gold (+4.5%), CrowdStrike (+3.9%) and Tencent Holdings (+3.3%); while the biggest losers were US Steel Corp (-8.3%), Nucor (-4.3%) and CRH (-3.5%).
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
