Goldman Sachs says gold is not the optimal store of value
(Kitco News) - Goldman Sachs released a report and said that gold is not an optimal store of value against inflation or deflation.
In the report, Sharmin Mossavar-Rahmani and her team noted the rise of the cryptocurrency industry cannot be ignored.
The team noted that the number of cryptocurrencies has increased from about 2,000, with a market capitalization of over $200 billion in late 2017, to over 8,000, with a market capitalization of about $1.6 trillion. For context, the market capitalization of global equities is about $110 trillion, that of the S&P 500 stocks is $35 trillion and that of U.S. Treasuries is $22 trillion.They also crunched the numbers on volume, adding, "Reported trading volume in cryptocurrencies, as represented by the two largest cryptocurrencies by market capitalization, has increased sixfold, from an estimated $6.8 billion per day in late 2017 to $48.6 billion per day in May 2021."
The research team went on the attack against gold. Below is an excerpt from the report:
"The second Insight, published in January 2010, focused on commodities, specifically oil and gold. Gold was touted as a much-needed asset to hedge against the inflationary impact of loose monetary and fiscal policies after the global financial crisis (GFC) and therefore, against the likely debasement of the dollar. The argument for gold in the aftermath of the GFC was identical to the argument for cryptocurrencies (cleverly marketed by some as "digital gold") as a result of the pandemic. We recommended against an allocation to gold, oil, or commodities in aggregate, showing that they were not an inflation hedge and that gold was not a store of value. The S&P 500 Index has outperformed gold by 327 percentage points, or 10.7 percentage points annualized, over the past 11.5 years. Adding many have touted holding cryptocurrencies as an alternative to holding gold.
The paper recognizes that Bitcoin is not perfect too. They spoke about the other side of the coin and said, "We also do not believe that Bitcoin is a long-term store of value or an investable asset class for diversified portfolios, as discussed in the next section of the report. Likewise, we do not believe that gold is an investable asset class as a store of value, so claims that Bitcoin is "digital gold" do not confer any value to Bitcoin."
Goldman then went on to say, "The frequency and magnitude of Bitcoin price declines are too high to provide the peace of mind that a store of value should provide."
The Investment Strategy Group highlighted gold as a disappointing long-term store of value for the following reasons:
Since the inception of pricing data, gold has provided an annualized real return of 1%, barely outperforming inflation. Adjusting for storage and insurance costs, the estimated excess return drops to zero.
Secondly, the only asset class that hedges inflation on a consistent and reliable basis is U.S. equities. They noted that U.S. equities have outperformed inflation 100% of the time over any 19-year window. Gold outperforms inflation only about 50% of the time over a 19- year window. So owning U.S. equities is a better long-term inflation hedge.
Lastly, On a shorter-term basis, U.S. equities have outperformed gold in most periods of positive inflation, as shown. Even when inflation was more significant than 6%, gold outperformed only between January 1970 and June 1970 and again between August 1973 and July 1982.