Investing in gold is a popular way of spreading risk in an investment portfolio. For all the glamour that comes from its scarcity and unique metallic qualities, gold remains on the radar of astute investors as a practical asset class because it generally offers a safe port when equity markets are stormy.
But, with new asset classes (like cryptocurrencies and new commodities) coming onto the market all the time, is gold simply a historical relic that’s had its time, or does it remain a standout choice for steady investment in the future?
What makes gold stand out as an asset class?
- Gold is a “liquid” asset, meaning it is easily traded.
- Historically, gold has been a measure of value that is recognised globally; this ubiquity accounts for its popularity in times of market turbulence.
- Unlike fiat currency, gold is not tied to the economy of any country.
- The physical metal of gold is (scientifically-speaking) “inert”, which means that it does not deteriorate with time and can be stored under most physical conditions.
How can I invest in Gold?
As a private individual, you can invest in gold by purchasing either a) physical gold items or b) “virtual” gold in the form of financial instruments tied to the price of gold which do not involve owning the actual physical substance.
Physical ownership of Gold – your options:
- Gold coins – investing in gold coins is a suitable entry point for gold investment because the items are relatively low-cost, widely available, easily stored and universally accepted for trade.
- Gold bars – larger than jewellery items, a 1kg bar of gold will set you back just over $40k. It’s an aspirational item with sound resale value.
- Gold jewellery – although popular in Africa and Asia, investing in gold jewellery has many disadvantages: the gold may be mixed with impurities and the final cost may include the jeweler’s work, taxes, and more.
Virtual ownership of Gold – your options:
- Unallocated gold account – several large banks offer the possibility of opening precious metal accounts. Unfortunately, investing in gold via such accounts is not guaranteed by deposit insurance or by the government.
- Trading gold through a broker – Currently, this is the easiest and fastest way to invest in gold directly. Investing through a broker does not involve physical operations with the metal, which makes it easy to invest in gold’s uptrend or downtrend with the same success. Also, one can apply margin trading to boost profits.
- Investing in gold-related ETFs – a stake in exchange-traded funds can be acquired similarly to any company stocks. Gold ETFs simulate gold’s price with high precision.
Advantages of investing in Gold
Gold tracks the global money supply
The main advantage of gold is that the gold price grows proportionally with the global money supply, which makes it a great instrument to buffer your portfolio against inflation, crises, financial reforms and unpredictable market shocks. The global money supply has been on an upward trajectory since the beginning of the millennium, and so has the price of gold.
If US interest rates stay low, Gold still looks good
If you are looking for a safe haven for your money, then you might consider the mighty US dollar as a safer haven than gold. But if interest rates stay low under new US President Trump, then gold remains a viable option. Why? Because when interest rates are low, the price of gold tends to be high. And when interest rates are high, the price of gold tends to be low. That’s because interest rates push up the value of the US dollar which, in turn, reduces the attractiveness of gold as an investment. Confused? Speak to your IFA and cut through the jargon.
If Trump creates a stronger dollar that will be bad for gold, that is for certain. But if interest rates stay low, gold should stay on the canny investor’s radar. Higher inflation often leads to higher interest rates but, in the US at least, interest rates continue to lag inflation – thus remaining “gold friendly”, as noted in Gold Focus 2017 of specialists Metals Focus.
Gold price goes up with political uncertainty
Outside of the USA, the global political stage in 2017 is rife with the sort of political uncertainty that has, in the past, seen investors push the price of gold up: ongoing Brexit negotations destabilising the entire EU, Trump vs. China, elections in Europe and conflict in the Middle East. Gold.org reports that in a global comparison of gold ETF products in Q1 2017, “European-listed products were the most popular, due to continued political uncertainty in the region.”
Disadvantages of investing in Gold
There’s far bolder investment options out there
Gold may not be the right investment tool for investors with a high risk appetite who are looking for astronomical returns. If this is you, then check out penny stocks or cryptocoins and be sure to take full responsibility for the risks involved!
Indian currency reform
India is a key consumer market for gold that started out being tipped as a bad area for gold in 2017 – but is possibly looking better as the year progresses. John Stopford of the Investec Diversified Income Fund argued in December 2016 that the removal of some denominations from the Indian currency – in a huge demonetisation of some 15 trillion rupees, or around US$220bn – would encourage Indian families to spend less on gold.
But the World Gold Council at gold.org report that in Q1 2017, “after a whirlwind end to 2016, Indian consumers enjoyed a period of relative stability in the domestic market, buoying demand. Continued remonetisation by the RBI lifted consumer sentiment, which encouraged demand ahead of the auspicious wedding season …”
Keep an eye on what happens with the Indian consumer market for gold – or ask your IFA for an expert opinion.
Rise in equity + bonds + US dollar = a gloomy prospect for gold
Chris Beauchamp of the IG Group argues that the 3 factors which usually depress the price of gold – a healthy equity market, increasing bond yields and a strong dollar – are all in ominous alignment for 2017.
The bull market we have seen for the last eight years in equities is not likely to end just yet: check. Because of rising inflation, investors are selling bonds which, in turn, drives up yields: check. Trump’s fervent nationalism is driving towards a strong dollar in the long-run, despite the US dollar having wallowed at a six-month low as a result of all the political carnage.
The Price of Gold
The price of gold peaked in 2011 close to $1900 per troy ounce. But a series of factors then exerted pressure, leaving the price in 2017 to bounce within a channel of $1200 to $1400.
The fall in metals prices generally can be tracked back to the implementation of the Dodd-Frank Act in 2011 by the US government as a response to the financial crisis in 2008. The Act made gold investing more troublesome for banks while hedge funds had new reporting requirements. The Act also announced a shift from the OTC markets to authorized exchanges. This situation, along with famous traders George Soros and John Paulson getting out of gold, underpinned a bearish sentiment.
Currently, the price of gold has stabilised somewhat, and moves inside the $1200-1400 channel.
Investing in Gold: verdict
Gold should be considered as a way to shield your wealth from turbulence in markets over the short-term as well as protect against Bear phases of the stock market over the long-term. In the light of this resilience, professional investors commonly maintain a 10% investment of their wealth in gold.
It rarely pays to be sentimental about investing, let alone about an individual asset class. But the special fascination of gold is based on a very practical value:
“For more than two thousand years gold’s natural qualities made it man’s universal medium of exchange. In contrast to political money, gold is honest money that survived the ages and will live on long after the political fiats of today have gone the way of all paper.”
(Economist Hans F. Sennholz)
So: Gold – old news or bold news? An old favourite precisely because it is never the bold option. Here at Holborn Assets we do not trade in gold directly on behalf of our clients – but as an investment class it is granted our stamp of approval as part of a fully-diversified portfolio.
Gold image attribution: Takasumi 123rf stock photos