Not everything that glitters is gold

Feel free to reach out to PSG Wealth Adviser  Jan-Albert Rossouw  directly.

During the Covid 19 pandemic the precious metal was a big saviour in any investor’s portfolio. As the global economy began to recover from the pandemic and market uncertainty diminished, investor focus shifted back to risk assets, leaving gold largely sidelined. As a result, gold prices remained relatively stable between 2021 and 2023, consolidating after the sharp gains seen during the height of the crisis.

Over the past 2 years though the commodity has enjoyed its biggest rally since 1978 – 1980. That is saying a lot considering the global financial crisis in 2008 did not quite make the cut. This of course begs the question, “Why has gold enjoyed such massive gains and who is driving up the price?”

Perhaps the most impressive part about the current gold rally is that it is happening despite relatively healthy financial markets and no signs of wide-spread economic distress similar to what was seen in the breakdown of the Bretton Woods system, the global financial crisis or the Covid 19 pandemic. There are however several catalysts.

1. Lower interest rates have reduced the opportunity cost of gold and pushed down real yields
2. Pressure on the US Dollar makes gold a more attractive haven
3. Trade tension (Especially US – China)
4. Central Banks & Institutional accumulation

Human beings, primitive as we are, have a tendency of following along with the trend. This is especially evident in investment decisions. Gold as a commodity now carries the risk of recency bias, as many investors may be extrapolating recent gains into the future without fully considering potential shifts in interest rates or macro conditions. This sort of herding behaviour is driving large inflows motivated more by momentum and fear of missing out than by fundamentals. If market sentiment shifts or central banks alter their policy direction, those late to the rally could face sharp reversals.

It is important to note that gold is not a risk-free asset class, in fact lately I have a hard time categorising it as a low-risk investment. The precious metal has had its fair share of underperformance in the past few decades. Following the speculative buildup during the 2008 – 2012 rally, gold lost about 28% of its value in the 2013 calendar year. In 2015 again the price of gold plummeted by 10%.

The recent rally might not be without some precedent, but when you consider that the dollar price of gold has risen by around 265% over the past 10 years and that nearly half of that growth happened in the past 2 years, it raises some concerns. This same analogy is of course true for many large cap stocks. The difference however is that gold is nothing more than shiny and scarce. Stocks grow because they represent dynamic businesses that can increase earnings and expand operations over time. Commodity prices fluctuate on supply and demand, geopolitical factors and broader economic conditions. None of which are predictable or without risk.

This article is not a call to fire gold from your portfolio just a request that it justifies its salary. While everyone's busy putting all their eggs in the precious metals basket, plenty of solid companies are quietly sitting on the shelf — undervalued and overlooked. Diversifying your portfolio isn’t just a risk-management move; it’s a smart way to make sure you don’t miss out on the bargains hiding in plain sight. After all, sometimes the real gold isn’t gold at all.

Feel free to reach out if you'd like us to review your portfolio and help you build a well-diversified strategy tailored to your unique financial goals.