Gold and Innovation

Gold and technology stocks are simultaneously experiencing a rally in 2020. That is rare. This in turn is good news for investors.

In a turbulent stock market year 2020, two opposing investments have so far yielded very similar returns. The Nasdaq 100 share index, full of companies promising a great future and hopes for spectacular growth, on the one hand, and the gold price, barometer of investors’ fear of economic dislocation, especially inflation, on the other, are both up around 25 percent (for investors from the euro zone).

In the long term, investors are better off with stocks. At Quant IP, we strongly believe in the long-term superiority of equities as an investment. Companies – especially innovative companies – that create value and thus generate returns for shareholders should be the most attractive investment in the long term. An investment in gold is an investment in a precious metal: no value creation, no interest, no dividends. It is therefore not surprising that the Nasdaq has been the much better investment since its inception (9400 percent vs. 500 percent):

But in the tech-crash of 2000 – 2003 gold held up well (+25 percent vs. -77 percent) and saved investors, who held both investments, from major price losses:

The situation was similar during the financial crisis, when on balance the gold price did not suffer any price losses, but the Nasdaq fell by 42 per cent:

How differently the gold price and the tech index usually develop can also be seen from the very low correlations in the market phases of the past 20 years:

• 2000 – 2003 (Tech-Crash): 0,05
• 2003 – 2008 (Tech-Recovery): 0,00
• 2008 – März 2009 (Financial Crisis): -0,16
• März 2009 – 2011 (Gold-Rally): 0,14
• 2011 – 2018: (Gold-Baisse): -0,02
• 2018 – today: 0,25

A correlation of 1 indicates a perfect sync, a correlation of -1 a completely opposite course. Values between 0.25 and -0.16 like this are so low that one can say that historically gold and the technology stocks on the Nasdaq are investments that move almost independently of each other. What can investors do with this information? Diversify! Anyone who believes in the market economy, the creation of value by companies and stocks as the most profitable investment in the long term has been able to make up for intermediate losses with gold. Gold can perform this function all the better at a time when government bonds (the other major diversifier for shares) are yielding negative returns.

Investors who mix optimism (equities) with pessimism (gold) will probably sleep better in the next crash – and currently enjoy a historically rare high correlation with rising prices on both sides.