During any type of economic downturn, the price of gold usually tends to rise. When the market drops, prices go up, and this is known as a negative correlation between gold prices and the market.
When the market goes down, investors tend to take their cash out of riskier growth stocks and invest in gold. In this way, investing in gold has been seen similarly as investing in cash. But here’s the thing. In 2023, that couldn’t be further from the truth.
When did you last use gold?
The problem with gold is that it has no use. Warren Buffett has long been against the commodity, as it serves very little value in terms of productive usage. It really is just there to look pretty. Despite having some useful purposes, such as heat conduction, there is too little of it to be a go-to product. Therefore, cheaper options are sought out instead.
Even without the usefulness of the product, it cannot be denied that gold will always at least be in some way in demand. But is it in demand enough to provide security? The thought has long been that you invest in gold during recessions and downturns, as gold can be turned into cash. However, this hasn’t been the case for decades.
In 1971, President Nixon ended the convertibility of the United States Dollars to gold. This was to address inflation and discourage foreign governments from redeeming more U.S. dollars with less gold. Since then, other countries have followed suit. And now, gold is no longer the major player that it was over the last few hundred years.
Why it’s like cryptocurrency
Today, gold is more like cryptocurrency than actual cash in hand. There are two ways this is true. On the one hand, gold is merely given a value based on what people are willing to pay for it. Again, there really isn’t a high demand for the product to be used by businesses. Therefore, it’s really just what people are willing to pay for it in terms of jewelry.
While you can’t wear cryptocurrency, it again is provided with an arbitrary value. Instead of wearing cryptocurrency, it’s worth whatever investors are willing to pay for what’s supposed to be global trading and protection from hackers. This is again similar to gold, in that gold is supposed to provide similar protection of an investor’s cash, and you can cash out both at a moment’s notice.
Beyond the arbitrary value similarity, cryptocurrency and gold prices are likely to climb and fall based on the market. Crypto is seen more as a growth stock at this phase, dropping when the market drops. Meanwhile, gold climbs as the market drops, only to fall once more when the market recovers.
Where to invest instead
These days, all this volatility should lead investors back to Warren Buffett. The man knows what he’s doing, which is why he has recommended staying away from both cryptocurrency and gold. Instead, invest in blue-chip companies that you can get a deal on these days, and hold them long term.
A solid blue-chip stock that would be a great option these days is Royal Bank of Canada (TSX:RY). It’s the largest of the Big Six Banks, in terms of market capitalization, and has a steady stream of cash coming from its wealth and commercial management business. Shares dropped as interest rate hikes went up recently, and could drop further in the near future. But as it’s a solid business with plenty of provisions for loan losses, plus growth opportunities from acquiring HSBC, it’s a great time to consider the stock.
Further, you can grab Royal Bank stock with a dividend at 4.32% as of writing, trading at only 12.5 times earnings. Shares are about on par with where they were back at the beginning of the year, and down about 10% since 52-week highs. So you’re certainly getting a deal on a long-term hold.
All-in-all, there are many ways to keep your cash safe, while also getting returns. And frankly at this stage, cryptocurrency and gold stocks simply aren’t what I’d bet on these days.
