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For years, gold is considered the safest form of investment, especially for the long term. But is it a good investment right now? Should you start investing in gold in 2021? Is gold better than crypto, or is cryptocurrencies the new gold?
To answer all these questions, we have Mukarram Mawjood with us. Mukarram is the CIO of Blackstone Commodity Group, which specializes in commodities and other alternative investments with an experience of more than 15 years.
In this blog, we’ve asked Mukarram about the relationship between the stock market and gold, how good is investing in gold, why he prefers physical gold over paper gold, and most importantly, is this the right time to start investing.
So if you’re interested in learning all these, then let’s dive right in.
What is the Correlation Between Gold and the Stock Market?
It’s essential to understand the relationship between gold and the stock market before we can discuss if it’s a good investment. Because if gold moves and behaves just like the stocks, then you’re better off investing in equity markets instead.
According to Mukarram, the larger directional correlation between gold prices and the equity market is inverse. So whenever the equity market as a whole goes up, you’ll see gold come down, and when the equity markets come down, or they have gone up for a significant period of time, then you’ll see gold prices going up.
Right now if you see, what’s been happening for the last 11 years is that markets are consistently going up. You might say we just saw a crash last year, but looking at the larger picture and the way we’ve recovered, it was kind of a correction. So you can say that there is a possibility for gold to go up in the future.
One interesting thing that Mukarram talks about here is, there’s a small time period towards the end of a bull run in an equity market where you’ll see gold go up as equity go up, and then sometime in that initial stage when the market comes down, gold drops along with it.
This phenomenon is called Margin Related Liquidation, and when this happens, markets can quickly bounce, which is exactly what we witnessed in 2020. But when the market goes back down after the recovery, gold will not go lower this time but reverse from there to start a bull run, which is exactly what happened from 2008 to 2011 when gold went up by 300%.
Is Gold a Good Investment Right Now?
Ok, so let’s get to the point, is gold a good investment right now? Well, Mukarram thinks so. He says everyone expected the time period leading up to the elections to be volatile, but even after the elections, you can see some nonsensical volatility in the markets. And what that usually means in Mukarram’s words is when a market behaves like a “2-year-old”.
“In such times, you have to pay attention to a topping behavior. If the market behaves like it for extended periods of time and gives you what I call nonsensical volatility, you might see a big downtrend coming in the stock market”, says Mukarram.
Keeping in mind all these factors along with the new Biden policies, gold can be an amazing investment if the market actually does come down.
Mukarram says that gold has already shown its hand in 2020 and the middle of 2019 when it made new multi-month highs while the stock market was making record highs. That’s what he calls “Canary in the coal mine” because that tells us that the stock market could come down big, and gold could go up significantly.
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Why Is Gold a Good Investment? Is it Because it is Considered a Safe Haven?
Mukarram says that gold has always been a safe haven but the interesting thing is, in the last 10-12 years, it’s acting as a safe-haven asset but still giving you aggressive returns. From 2008 to now, it has nearly quadrupled.
Also, some big names like Warren Buffet and Ray Dalio are betting big on gold and have just purchased more than $800 million of it recently.
What Are Your Views on Cryptocurrency? Is it Gold 2.0?
Mukarram seems onboard with the idea of Cryptocurrencies being the next store of value. He believes that a lot of confidence has come into the cryptocurrency market, and many young investors are excited about it.
Also, many new cryptocurrencies like Etherium, Litecoin, Ripple, etc. have come into the market after bitcoin, and they all seem to have a lot of legs going forward in the future.
There are two things that Mukarram stresses, and those are that, first, he believes that cryptos will act as the gold for young investors, and second, it’ll be a place where you’d like to protect your wealth.
Cryptos can’t be called a safe haven, like gold, silver, and some other commodities but they’ll still act as a way you can protect your wealth.
An interesting thing Mukarram shares with us is that in his 15 years of career, he has never seen groups of precious metal buyers talking about cryptocurrency, but on this gold bull run since the middle of 2019, that has changed.
A lot of precious metal buyers are now talking about cryptos, and they’re warming up to that new asset, and that’s the reason why Mukarram thinks cryptos will be the next big thing.
Also, he himself is diversifying into cryptocurrencies because, in his views, that is an asset that will benefit the most from the Biden presidency.
Why Do You Recommend Physical Metals Over Paper?
For those who don’t know, paper gold refers to gold that only exists on paper. It is not necessarily backed by the actual asset i.e. gold. It’s also not necessarily a promise for actual gold but anything that gains & losses value according to gold prices. Paper gold includes gold certificates, gold futures, gold exchange-traded funds (ETF), and even gold mining stocks.
According to Mukarram, if you’re looking for a safe-haven asset that you would want to hold on to for the next few years to protect your wealth, then you should always prefer physical gold over paper gold. But why is it so?
Mukarram gives you two reasons, first, if you’re buying mining stocks because you think that the price of gold will appreciate in the future, then be careful with that analysis because a mining stock is still a company that can have a plethora of reasons why it may not perform even when the price of gold goes up, for example, if the management team is bad or their financials are not good and so on.
Another thing is that physical metal ownership gives you some tax advantages over paper based on the type of metal you are owning.
How Should One Get Started With Investing In Gold?
A common misconception people have about physical gold is that it is very hard to trade, which, Mukarram says, is not the case. With a company like Blackstone Commodity, you can buy and sell physical metal with one phone call, where they will either do a physical delivery of the gold at your house, or you can have them inside your retirement account where metals will be kept at the Delaware Depository.
On getting started, Mukarram says there is a time when you should accumulate physical metals, which is in the beginning stages of a bull market. Then at the later stages, when the physical prices have gone up significantly, you can shift towards gold futures and mining stocks.
Mukarram’s company also helps their clients get started with gold and other physical metals. So if you have a stock account that you wanna exit before it losing it’s value in a bear market, then you can contact them at their website, and they can help you set up a physical metal transaction.