After nearly a year of surprising political developments, odds-on-favorite Emmanuel Macron’s victory in France last month was a welcome change and a relief for many. As the the United Kingdom general election took place last week and with negotiations with the EU expected to begin later this month, the issue of whether Brexit will be of the “soft” or “hard” variety remains in the foreground. The Eurozone project has long had its fair share of detractors, and for many Eurosceptics the Brexit referendum last year further reinforced the view that the eurozone is destined to fail.
To be sure, there’s nothing really new about this. Back when the European Currency Unit (“ecu”) was officially replaced by the euro in January 1999, I was in my first year of university in the UK. In those days, Labour was in power and Prime Minister Tony Blair’s europhilia was juxtaposed with the “five economic tests” set by then-Chancellor Gordon Brown, who was far less enthusiastic about the eurozone’s prospects. The issue of British euro membership has long been a fairly divisive one, and the key question of sovereignty remains a central concern with regards to deepening the Union as a whole until this day. Traditionally, uncertainty has tended to be positive for gold.
GOLD PERFORMANCE IN EUR TERMS
Since the inception of the single currency, being long gold has been a good proposition for eurozone investors, with better risk-adjusted returns than those on main equity indices such as the DAX, CAC, and Eurostoxx 50. In fact, since January 1999, when LBMA prices traded at 250.90 in euros, gold has seen a compound annual growth rate of some 8.7% compared to 5.4% for the DAX, 1.5% for the CAC 40 and around 0.15% on the Eurostoxx 50, using monthly data and closing prices from May 31.
Over a 10-year holding period, gold in EUR terms had annualized monthly returns of 11.6% with a standard deviation of 2.1%. Meanwhile, the DAX returned an average of 4.9% with a standard deviation of 4.3%, while both the CAC and the Eurostoxx 50 lost money. The French index recorded a loss of nearly -1.1% with a volatility of 2.6%, while the European benchmark performed even worse with -1.9% and standard deviation of 2.7%. In contrast to stocks, since the euro became legal tender gold has not experienced negative returns over a 10-yr horizon. In other words, the precious metal has performed better than equities, with lower volatility to boot.
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