OP INION
Solid investment
Te allure of gold as an asset has long held sway, and that isn’t set to change
J OHN STEPEK E XECUT IVE EDITOR OF MONE YWEEK MAGA ZINE
still hold a great deal of gold in their reserves. At first glance, it looks like a strange thing
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to own. Te standard method of valuing an asset is to look at the future cash flows it will generate, to work out its present value. But gold pays no income – indeed, it costs money to store – and doesn’t have many uses: there is some industrial and jewellery demand, but the global supply of gold is more than sufficient to meet these needs. And, yet, you should
own some nevertheless. Why? Because all of these attributes make gold quite different from the other assets you would typically have in your portfolio, and as a result it can be an excellent diversifier.
old has long played a role in the financial system. Even now paper currencies are no longer backed by gold, central banks worldwide
level of risk your portfolio is taking, without sacrificing too much in terms of returns. Tis is where gold comes in. It has
characteristics that bonds and equities do not. It is one of few assets with no counterparty risk – a bond issuer can fail to repay its debts, while the value of shares in a company can fall to zero – but gold is just gold. Tis means that when faith in the long-term value of other financial instruments is deteriorating – oſten because the economic backdrop is grim, putting cash flows from bonds and equities at risk – gold tends to do well. To be clear, the gold price is volatile.
Gold tends to go up when everything else is going down, and vice-versa
VARIETY SHOW Diversification is key to the success of any long-term investment portfolio. One common example is a 60/40 portfolio, split between equities and bonds respectively. Bonds and equities oſten (although not always) behave differently from one another, with bonds generally viewed as being the less risky. By investing in assets that behave
differently from one another during varying economic backdrops, you reduce the overall
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Tere are plenty of environments in which it performs poorly, relative to other assets. For example, 1981 to 2000 turned out to be an epic bull market for bonds and stocks, but were a disaster for gold. It then soared from 2000 to 2011, a period that covered two huge bear markets for equities, before sliding out of favour between 2011 and 2016. Te point is not that gold goes up and down – it’s that it
tends to go up when everything else is going down, and vice-versa. As Christopher Dhanraj, head of iShares investment strategy for the US at Blackrock, noted in a blog earlier
this year, gold tends to do well during periods when other assets are doing badly – during the worst periods of the last three recessions, “gold has outperformed all other asset classes”. As a result, notes Erik Norland of CME Group, in the past “holding gold as part of a diversified portfolio would have marginally improved the portfolio’s
long-term risk-adjusted returns”. You’ll find conflicting advice on how much gold you should hold to get the benefit, and the answer is that it’s different for everyone. But if you’re looking for a loose ballpark figure, then 5-10 per cent is probably in the right region.
HOW TO INVEST IN IT You can buy a fund that tracks the gold price. Choose a fund (known as exchange- traded commodities) that is backed by physical gold, stored in vaults. Tere’s an annual charge, but they are convenient and can be held in a tax-efficient wrapper such as an ISA or a SIPP. Te Royal Mint plans to launch one of these tracker funds in the near future, but for now one of the best-known is ETFS Physical Gold, which is listed on the London Stock Exchange and can be bought via most online brokers – the ticker is PHAU for the dollar-denominated version, or PHGP for the sterling-denominated one. You could also buy physical gold direct and
have it stored remotely, using the likes of Bullion Vault (
bullionvault.com) or Gold Core (
goldcore.com). If you would rather have it to hand (in case of complete financial or social breakdown), you could consider buying coins or even bars from a bullion dealer and keeping it at home, in a safe. Note that this will cost money and you’ll need to inform your home insurance provider. One key caveat – gold mining stocks are
oſten cited as another way to invest in gold. I’d disagree. Teir performance is linked to the price of gold, but they are equities, not gold. So if you are bullish on the gold price then by all means consider investing in gold mining stocks, but consider it part of your equity allocation, not your gold allocation. BT
bus ine s s tr a v el ler .c om
BENJAMIN SOUTHAN
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