How to Invest in Gold: Returns from 20 Years of the Hungarian Gold Market

The Hungarian gold market turns 20 this year. Since EU regulatory harmonisation, investment gold can be traded VAT-free in Hungary. Prudent gold investors have achieved outstanding returns over the past two decades.

This is the second article in the "How to Invest in Gold?" series. In the first, we explored what it takes to become a prudent gold investor; here we examine what return gold has actually delivered.

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By the way — gold pays no interest! This is the most frequently cited "anti-gold" argument by those outside the market.

But who cares about interest when gold investment offers very strong returns?

Let us look at the numbers.

I have divided the full period into cycles — somewhat arbitrarily, but many readers will still remember the autumn 2011 panic triggered by the nationalisation of private pension funds, or the wave of buying that followed the outbreak of Covid and then the Russia-Ukraine war. Not long after each of these events, the gold price measured in forints reached a peak, followed by a period of sideways movement and consolidation.

Each cycle begins at the previous price peak, passes through a trough, and then forms a new peak. Every subsequent peak has exceeded the previous one. The duration of cycles has varied considerably: they have generally lasted 1-2 years, but the 2011-2020 period stands as a cautionary example — investors had to wait 9 years for the next significant top.

What conclusions can be drawn from the return table?

• A strong upward trend: in five out of seven possible cases, the trough of the following cycle exceeded the peak of the cycle two periods earlier — and the two exceptions were not particularly severe.

• Over the long term, it was impossible to go wrong with gold investment over the past 20 years: longer-term annualised returns have been very impressive, typically exceeding 10% per year — during a period when government bond yields (outside the recent past and the 2008-2009 market crash) were extremely depressed. Physical gold investment has therefore been a very strong alternative to government bond investment.

• An investor who "panic-bought" and did not retrain themselves as a prudent investor could have suffered significant short-term losses (the maximum loss within a cycle was typically around 20% in a single instance, plus the round-trip transaction cost). It does happen that novice gold investors convert all their money into gold in a panic, and then when the panic subsides and they need cash, they are forced to crystallise the loss — or fall into an even worse trap: "the panic is over, I no longer need gold."

• The maximum gains have been considerably larger than the maximum losses. This is very good news, but it also means it is very easy to become a "laggard trader." What does this mean? Novice traders are often pleased when their position goes slightly positive, and when positions approach the maximum loss levels seen in historical cycles on the upside, they almost invariably "exit proudly" — then wait for a better entry point, telling themselves "it will come down further, I'll get back in lower," and in doing so miss the largest gains.

• Time smooths out the difference between the best and worst trader. When returns are viewed truly over the long term, the worst investor (who bought at the exact peak) and the best investor (who bought at the exact trough) differ from one another by an average of only 2-3%. So it is well worth a "panic buyer" retraining themselves as a "prudent gold investor." In the short term, however, timing matters greatly. Looking at only the last two cycles, the return differential between the worst and best entry point was not the usual 3% but as much as 7.9% per annum or even 47% in some cases. So patience is essential. Use cost averaging — the average entry timing can easily be achieved by investing a fixed amount monthly.

A few closing thoughts on costs:

Under normal market conditions, the round-trip transaction cost at Goldtresor is less than 3-4%, even on amounts of just a few grams. Spread over a 10-20 year investment, this is negligible.

If the client does not request physical delivery but instead uses the insured storage service, the fees amount to less than 1% of annual return drag. This is less than the combined cost of brokerage fees, securities account custody charges, and the management fee built into an ETF.

Physical gold investment is therefore not expensive as a baseline proposition.

It is worth bearing in mind, however, that during periods of gold supply tightness — such as at the outbreak of Covid or the Russia-Ukraine war — spreads can widen significantly on a temporary basis.

Physical gold investment unfortunately does not enjoy the same tax advantages as securities accounts with the Hungarian long-term savings (TBSZ) tax regime or government bonds — but in return, it is entirely independent.

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