Degussa Analysts Show Gold Has Beaten the U.S. Dollar for Nearly 50 Years

While the U.S. Dollar is subject to systemic shock, gold benefits from it.

In less than a week, gold bounced back from a lengthy tepid period to gain roughly 5%, bringing it to a three-month high. The outperformance could be seen as a victory against a persistently strong dollar, which has kept gold prices subdued over the previous months despite intensifying haven demand.

However, according to an article on Kitco, analysts at Degussa explained why gold has been beating the dollar for nearly 50 years, even during times when the greenback seemed unshakeable. Compiling data from 1970 to 2018 and focusing on gold prices in real terms by taking inflation out of the equation, Degussa's team found that gold has returned an average of 5.9% each year.

In contrast, holding U.S. dollars in a three-months old bank account would have annualized an average return of 4.6%. The results of the study largely stem from the dollar's continued loss of purchasing power, as the greenback has lost as much as 85% in that regard since 1970.

The analysis comes as investors worldwide begin to doubt the stability of supposed safe-haven currencies and the monetary systems built around them. As Degussa's analysts noted, much of the global monetary system rests on the U.S. dollar keeping its value, yet there are signs that the greenback could soon find its role compromised.

With the ongoing threat of China dumping an immense amount of U.S. bonds and a national debt of over $22 trillion, one could make the argument that the greenback hasn't looked as vulnerable in a while. Like all currencies, Kitco states the U.S. dollar is subject to systemic shocks, yet its status makes these scenarios particularly menacing. As the world's reserve currency, a rapid faltering of the U.S. dollar and the ensuing loss of confidence in it could plunge the entire global economy into chaos.

Gold, on the other hand, suffers no threat from questionable central bank policies or collapsing economies, but rather benefits from them, reports Kitco. The only cited downside to owning gold comes in the form of a perceived opportunity cost of holding it during times of higher interest rates. With the Federal Reserve's quick shift from a hawkish standpoint to one that signals concern, even this perceived downside has been eliminated.

Degussa's analysts think that the economic outlook is fairly straightforward. The steady trickle towards negative interest rates by the world's major economies will create a situation where owning bonds punishes investors instead of rewarding them. Add to this the ever-shakier haven currencies, and the analysts say people will once again be reminded that gold is the only true safe-haven asset with no clause or vulnerability.

The latter point couldn't be timelier, as most agree that the era of risk-on investment is drawing to a close. According to Kitco, U.S. stocks are about to end a decade-long bull run as growth concerns reverberate across the globe. As central banks prepare to debase currencies further through more money-printing programs, the impending move towards safety-oriented strategies could look more like a panicked rush than a steady migration.

International Bullion Firm Claims Gold a Good Insurance Policy

Analysts say prospects of higher rates does little to take away from the metal's appeal.

Last week the Federal Reserve met expectations by hiking interest rates for the first time in 2018. While gold's price trended lower in the aftermath of the hike, Kitco reports that one international bullion firm believes the prospect of higher rates does little to take away from the metal's appeal.

In their latest report, analysts at Degussa said that investors should view price dips as an entry point given the various factors that make gold investment a prudent strategy. Besides general protection against fiat currency manipulation, the firm pointed to the possibility of rate hikes leading to a recession as a particularly poignant reason to consider gold in one's portfolio.

Using the same analogy that multiple other analysts have turned to, Degussa explained how the Fed's hikes could ultimately have a major adverse effect.

"The Fed's tightening policy is like taking away the 'punch bowl,' and if it raises interest rates too much, the party would definitely come to an end. It is against this backdrop that gold, even in times of slightly higher real interest rates, is increasingly attracting investors, which has ultimately led to a price increase," said the report.

Although gold is mostly seen as an asset, the analysts noted that the view of the precious metal as global currency is gaining traction, namely because of inflationary pressures that erode faith in fiat money. Gold is frequently pitted against the dollar and soars in times of a weaker greenback, but Degussa's team noted that the metal continues to outperform a basket of global currencies.

"The price of gold should, over the long run, compensate its owner for the loss in the purchasing power of fiat currencies," the firm said.

The markets were near-unanimous regarding the likelihood of the latest hike, but there is plenty of doubt in regards to the Fed's future course of action. The Kitco article writes that while some believe the Fed could hike rates up to four times this year, especially given the hawkish tone of new chair Jerome Powell, others cast doubt on their ability to raise borrowing costs further.

According to Kitco, another factor that could play in gold's favor is a potential shift in the Fed's rhetoric. The central bank bases its current strategy on forecasts of a stronger economy and a lower unemployment rate, with hopes that inflation will reverse its backwards trend and meet the targeted rate. Despite their optimism, some market participants believe that the Fed will alter its prognosis in one or more areas, which would give rise to higher gold prices and serve as an additional deterrent from successive rate hikes.