Jake VanKersen: Gold is thought of as a safe haven investment. So, in times of turbulence, like, say, the summer of 2020 when the pandemic was raging and investors were worried about the economy, the price of gold swelled to $2,000 an ounce. Why is gold thought of as a safe haven?
Kristoffer Inton: At Morningstar, we use five characteristics to judge an asset's quality as a safe haven. First, there should be a very liquid market for it. Second, it should also have a purpose other than a store of value. Third, it should be rare. Fourth, people should want it in the future. And finally, it shouldn't degrade over time.
VanKersen: So, basically, gold hits all five of those characteristics because it is a rare element that essentially lasts forever with multiple noninvestment purposes that people want and is very liquid.
Inton: Pretty much.
VanKersen: Okay. Well, what about cryptocurrency? Because some guy on Twitter posted a thread filled with logs about how it is totally safe.
Inton: No.
VanKersen: Okay. Why?
Inton: Cryptocurrency falls short in a few big ways. It isn't as liquid. It doesn't really have a functional purpose since its acceptance as a currency is still so limited. It's only been around for about a decade. So, it's hard to be sure if there will be demand for it in the future.
VanKersen: So, is gold the only safe haven?
Inton: The most competitive asset to gold that could be a safe haven is U.S. treasuries. Treasuries are extremely liquid, but they don't really have a function outside of investment and the government could issue as many as it wants. But they are permanent and there is a guarantee of demand.
VanKersen: So, why has gold risen so much?
Inton: U.S. treasuries generate return with an interest rate set when they are issued, which means the return is eroded when inflation rates rise. Gold, by contrast, is just a rock, so it doesn't pay anything out, but it tends to maintain its value in real terms during inflationary periods due to its scarcity. Simply put, the gold price tends to rise when the inflation rate is equal to or higher than interest rates, in other words, when real interest rates are low or negative.
VanKersen: Who is buying gold?
Inton: Well, there are four main categories of gold demand – jewelry, technology, central banks and investments, mainly through ETFs and bars and coins. This year, ETFs have bought a lot of gold and we think that's a risk because these funds will eventually want to sell to realize a return and they can quickly do so when real interest rates rise. Today's surging ETF demand is tomorrow's flood of recycled supply. And when that happens, other categories aren't going to be able to absorb the vacuum left behind.
VanKersen: So, is gold going to stay high forever?
Inton: We don't think this will last forever. In fact, gold prices are currently 25% higher than the long-term forecast. When economic conditions normalize, we expect prices to fall to about $1,300 an ounce in today's dollars.
VanKersen: Well, thanks, Kris, for giving us all this knowledge that we can put in the bank, the knowledge bank
