We look at the arguments for and against buying gold, outlining how the precious metal can offer some insurance in a portfolio of mixed investments.
Gold is not perfect, but it can limit risks
The arguments against owning gold tend to oscillate around the fact the physical asset does not pay a dividend or interest, it is difficult to value and its long-term returns are poor.
Despite this, we still hold a near 10% exposure to the metal across our portfolios and believe we will likely maintain the position for a while to come. Why is this?
Widespread central bank experimentation with negative rates has impacted bond yields, twinned with the devaluation of sovereign currency as money has been printed in the hope of simulating growth and inflation.
While physical gold doesn’t pay an income, it’s more attractive when bonds are returning negative yields - gold tends to appreciate when currencies depreciate as observed by the interrelationship between the dollar and gold over time. Furthermore, while physical gold doesn’t pay an income, investors could buy shares in gold miners that pay dividends giving exposure to gold.
The Valuation Question
As an investment, gold is difficult to value as it has no cash flows and does not contribute to economic growth. Maybe then it shouldn’t be valued as an investment but as a currency? After all, before fiat currencies, gold was the standard by which paper currency was once valued.
The devaluation of currencies should be a tailwind for gold. Since August 2018 to February 2020, gold has returned c.33% or an annualised rate of c.21.5% in dollar terms. Another way of looking at this is that gold has appreciated against the dollar by c20% in the last year in dollar terms.
Going for Gold over the Long Distance
Framing a positive or negative view can come down to the period analysed and what gold is pinned against - for example stocks or bonds. When tracking performance against the S&P 500 and an All Bond index on a total return basis in sterling terms, gold has outperformed both stocks and bonds since 2000. Over the last 10 years however, the S&P 500 has significantly outperformed.
We are not looking at holding gold for the long-term, least until we believe market dynamics have shifted to a position when gold no longer provides the insurance we want. Our holding period will be dictated by the extent to which central banks continue to print money and the persistence of negative rates.
It's worth noting that holding gold or investments that have a direct dependency on gold is not without its risks. While we believe it to be a good diversifier in the portfolio at present, gold can be volatile on account of investors difficulty valuing gold as an investment due to a vast array of factors from supply and demand to those touched on in this piece. We would therefore suggest that gold is suitable for those with at least a medium level of risk appetite.
Where to invest in the gold market?
Physical gold coins or bullion: there is likely to be a huge mark-up on the price of the gold coins, bar or jewellery. Investors will also need to find a way of storing it and keeping it safe, which may be costly. Furthermore, you will also have to find a market to trade it through which can incur additional fees.
Exchange Traded Commodity (ETC): is often considered as the next best thing to owning physical gold, but unlike physical gold can be easily traded.
- Invesco Physical Gold ETC is a low cost option, with a fixed fee of 0.24%, which aims to provide the performance of the spot gold price, after the impact of fees.
Funds: perhaps the best way to get a diversified solution. They are managed by experts and able to exploit both gold price changes and the effect this can have on companies involved in the supply chain.
- Investec Global Gold invests around the world primarily in the shares of companies involved in gold mining. A concentrated portfolio that has performed strongly when gold prices have risen.
If you are looking for something a little more diverse the The Merian Gold & Silver fund provides a dynamic rotation between physical gold & silver and gold & silver mining equities.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.