Goldman’s on Gold 30 Years Since Black Monday

On this day, the 30th anniversary of the famous 1987 Black Monday Crash it is timely to summarise a new in depth historical analysis of the gold market by none other than Goldman Sachs. 

Goldman’s go back, way back, and measure the gold price against household savings, supply and central bank transactions.  Indeed they found that there is a historic (40 year) 1.7% ratio between gold purchases and household savings that varies only in ‘risk off’ / ‘fear’ market events when gold surges more.  The following quotes provide their insights and conclusions from the 90+ page report:

 “We see large and persistent deviations from the long-run equilibrium allocation to gold, driven by ‘risk-on’/’risk-off’ episodes. While the forces driving risk sentiment can shift over time, they are nearly always highly cyclical in nature. Growth expectations and the business cycle are therefore key variables, being negatively correlated to gold demand.” [it might be worth revisiting our article here on this]

“Gold tends to preserve its real purchasing power over the very long run (albeit with substantial short-term deviations). Since Roman times, the real value of gold has remained more or less unchanged in the face of wars and political, social and technological shocks. Many investors therefore see gold as a way to hedge against structural tail risks, which could potentially erase the real value of all other financial assets…Throughout history, governments have run deficits and built large levels of debt. Having accumulated a large stock of debt, governments must either pursue austerity, and a way to boost growth, or engineer inflation (‘print money’) to erode the real value of their debt. Historically, governments often chose money expansion over austerity. Gold has traditionally been in competition with government paper currencies. When there is loss of credibility in the central bank/government’s ability to meet their liability of maintaining the real purchasing power of their currency, gold demand tends to go up. Normally, this happens when the government does a large monetary expansion, which the public fears could lead to currency debasement.”

“Investors have become more conscious of the physical vs. futures market distinction in the post-2008 crisis period. As such, the fear drivers have likely tilted demand more in favor of physical gold (or physically-backed ETFs) as a hedge against black-swan events vs. using futures.”  [we again will point out that ETF’s are NOT a direct gold play per our last article on this here]

“precious metals remain a relevant asset class in modern portfolios, despite their lack of yield…….They are neither a historic accident or a relic. Indeed, by looking at each of the physical properties of an ideal long-term store of value…we can clearly see why precious metals were initially adopted and why they remain relevant today.”

30 years ago, 17 years ago and 10 years ago we were painfully reminded of what ‘risk off’ looks like.  Don’t be caught out again.