With gold returning more than 28% since the start of this year*, it is attracting considerable attention and we are getting lots of questions from clients interested to know our views on investing in gold and the investment options available. At Bestinvest, we have held physical gold in our central portfolios since last October and increased this exposure in July. Whilst we don’t believe that gold always deserves a specific allocation in portfolios, we believe the environment now supports the investment thesis. Here we discuss some of the reasons we favour gold, along with potential routes to investing.
Gold in the current investment environment
Aggressive and unconventional monetary policy, such as so-called ‘money printing’ by Central banks, has pumped excessive liquidity into the financial system. This, in turn, has driven up the price of assets such as equities and bonds, leaving both appearing relatively expensive. As these asset classes have started moving more in lockstep, alternative asset classes that have low correlations with equity and bond markets – such as gold – become more appealing and offer much needed diversification.
Gold as a store of value
Whilst it lacks any significant intrinsic value, many investors, both historically and today, use it as a store of wealth – the modern equivalent of a chest full of gold coins! Although gold is usually denominated in US dollars, for convenience more than anything else, on an underlying basis it can almost be considered currency-less. With Central banks embarking on ever more inventive ways to loosen monetary policy, not just through quantitative easing, but negative interest rates and maybe even ‘helicopter money’, we could see a form of competitive currency devaluation across major currencies, which would be difficult to accurately predict in advance. If this prompts investors to look for somewhere to park their wealth that isn’t paper currency, gold could be considered an option. This isn’t to say that gold should be thought of as a ‘safe haven’ – at times it has fallen more than 40% since its post-Global Financial Crisis peak in US dollar terms. However, its finite nature makes it resistant to the currency devaluation that could ensue as Central banks tinker with the paper money supply. In addition, a zero yield is much less of a hindrance in a world of ultra-low, zero or negative interest rates.
How to invest in gold
The two most common ways to invest in gold are to buy the equity of companies that mine gold or exchange traded products based on the actual price of the underlying metal. Our preferred option by far is to use exchange traded products tied to physical gold bars held in secure vaults. These provide easy and cost-effective exposure to the physical asset, without some of the complexity you can get when using synthetic products which are based on futures contracts.
The alternative method, using gold mining equities, has been used by investors in the past to great effect, since movements in the price of gold tend to be amplified in the equity price, and these investments can also offer a small dividend yield. The BlackRock Gold and General fund could be used to provide such exposure, however, we would caution that gold mining equities are still equities, and can be more volatile than the underlying gold price – and if there is a significant downturn in equity markets, gold miners could be dragged down too, failing to provide a diversification benefit when it is needed the most.
A fund that our research team rates highly is ETFS Physical Gold. This exchange-traded product tracks the spot price of gold with a lower ongoing fee than actively managed funds. The fund is backed by physical gold bars that are stored in secure vaults by HSBC.
For more information on investing in gold or if you have any questions about your investments, please call us on 020 7189 2400 or request a call back.