This week, the price of gold surged past US$4,000 (~ A$6,100) an ounce for the first time in history, capping a phenomenal year in which the price of the precious metal has increased by 50%.
Over the last 3 years (since October 2022), the gold price in USD terms is up approximately 135%, a return that eclipses the S&P/ASX All Ordinaries Index (ASX: XAO)'s total return of 48% over the same period (based on S&P Global's ASX All Ordinaries Total Return Index).
This is a trend that has captured the imagination of punters and institutional investors alike, and so if you managed to get in on it with some exposure to gold, congratulations!
It does, however, beg the question: What can we learn from this meteoric rise?
Here are 3 quick thoughts.
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Is gold really rising or are fiat currencies quietly falling?
This is one of the most fascinating questions in finance, and while we already know that fiat currencies depreciate, it's mind-blowing to see it in action.
Warren Buffett famously pointed out that gold is a non-productive asset that produces no income and does little more than sit in a vault.
We can all agree that this is true, and yet the gold price has been rising in every major currency. That suggests that the issue might not be with gold but with fiat currencies.
As central banks around the world "print" more currency and governments run large deficits and take on larger debts, inflation rates remain elevated, and each Aussie dollar, US dollar, pound, euro, or yen is buying less real value over time.
In that sense, one might argue that part of the rise in gold prices is simply accounted for by the reality that paper money is going down.
For long-term investors, that's a reminder of a timeless truth: it pays to own assets (or in this case, a store of value).
Whether it's shares in strong companies, real estate, or even an allocation to gold (or bitcoin), holding real, scarce, or productive assets is the best defence against currency erosion.
Stock prices typically outperform commodity prices
Whilst the rise in gold prices is impressive, it pales in comparison to the rise of major gold producers such as:
- Evolution Mining Ltd (ASX: EVN) – up 132% YTD
- Newmont Corporation CDI (ASX: NEM) – up 121% YTD
- Northern Star Resources Ltd (ASX: NST) – up 60% YTD
When a commodity like gold rises, the companies that mine or produce it often rise even faster. That's because miners offer operating leverage in that their costs to produce are largely fixed (or rise linearly with production), so when the price of gold goes vertical, profits can jump exponentially.
What goes up fast can come down even faster
As gold makes all the headlines, it's easy to get caught up in the fear of missing out (FOMO). Just remember that prices can also come down, and you have to be prepared for that possibility.
If you own gold or gold-related stocks, it might be helpful to think about position sizing, diversification, and your exit plan. If you don't yet have a position but are considering it, it's also helpful to think about how you plan to manage the risk of a downward trend, and of course, sitting it out is always an option.
Foolish Bottomline
Gold's surge is a powerful reminder that markets are mirrors that reflect not only fundamentals but also our collective hopes, fears, and the value we place on money itself.
Whether you see the rally as a sign of gold's strength or fiat's weakness, the lesson is the same: real wealth lies in owning assets.
In a world awash with fears of inflation, wars, debt, and an ever-changing geopolitical landscape, the rise of gold is a vote for scarcity as a store of value. But in it is also a warning. The same emotional forces that drive assets higher can turn just as quickly in reverse.
