Wednesday 19 February 2020 5:42 am

Follow the yellow brick road: the investment case for gold

Investing can often feel like a rollercoaster, with the value of stock investments rising and falling sharply based on breaking news and geopolitical events.

Certainly, the last few months may have felt bumpy. From the build-up to the UK General Election in December, to the tit-for-tat missile volleys between the US and Iran, to the outbreak of the coronavirus, it’s understandable if investors feel a little shaken.

During moments such as these, investors often move their money into “safe-haven assets” — investments that can weather whatever is affecting global markets. The most traditional safe haven is gold, which is still proving widely popular.

“Gold is widely viewed as a port in a storm, with many investors dedicating a small portion of their portfolio to the precious metal to hedge against uncertainty in the world economy,” explains Dzmitry Lipski, head of funds research at Interactive Investor.

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The value of gold has rallied in recent months, from a low of $1,450.41 per ounce in November, hitting a peak of $1,611.25 in early January. Gold is currently trading around the $1,587 level, up nearly nine per cent over the last three months.

But why? Despite recent geopolitical uncertainty, global stock markets are also trading around record highs, so what has driven the price of the precious metal?

“Gold’s price surge since mid-2019 has been driven by the plunge in bond yields, with bullion joining the ‘deflation trade’ into major government debt and so-called ‘safe haven’ currencies like the Swiss franc and Japanese yen,” explains Adrian Ash, director of research at BullionVault.com.

“Because gold pays no interest, but also can’t go bust or be created at will, bullion prices are very sensitive to changes in bond yields, most especially after you account for inflation.”

With government bond yields at record lows, and in some cases negative, gold has become comparatively more attractive. 

Looking ahead, gold’s price is likely to continue to climb. Analysts predict that the commodity’s value will rise by 12 per cent in dollar terms by the end of the year due to investors and central banks adding to their gold positions as a way of spreading risks.

“Last year, gold gave its best showing since 2011,” adds Ash. 

“Consensus forecasts for 2020 see another year of solid gains thanks to the outlook for weak economic growth, low interest rates, a possible turn in the stock market, plus continued geopolitical uncertainty.”

However, not everyone is a fan of gold. Edward Park, deputy chief investment officer at Brooks Macdonald, says his company is cautious towards gold at the moment.

“We believe the price of the metal has become disconnected with the total stock of negative-yielding debt which has been a reliable predictor of prices in the past,” he explains. 

“We do not have a strategic allocation to gold, as its fair price is notoriously hard to determine, with pricing influenced more by investor demand than fundamentals.”

Family treasure

Still, gold can clearly be a useful investment for hedging against risk, as well as adding another asset to a portfolio of stocks and bonds which can rise when the others fall. But how much should you hold?

According to the World Gold Council, holding between two per cent and 10 per cent in gold in an average investor’s portfolio over the past decade would have produced higher returns than none at all, so picking between these levels is a good rule of thumb, depending on how much risk you want to protect against.

“The numbers from the World Gold Council are as good a place to start, as any,” says Robin Newbould, managing director of BullionRock, when asked how much of an investor’s portfolio should be gold. 

“We certainly don’t advocate remortgaging your house and selling all your bonds and equities to invest into precious metals — we wouldn’t want to put even all our golden eggs in one basket. We do find however that, once bought, gold tends to form a part of investors’ portfolios ‘for life’ — and in fact, even longer: we often see gold passed down through generations.”

Precious metals

Once you’ve decided you want to invest in gold, the next question is: how? It is not necessarily straight-forward, and there are various ways. 

One way is to buy physical gold bars and coins through online sites, and keep it at home. This gives you more control, and UK investors also benefit from being exempt from paying capital gains tax on Britannia and Sovereign gold coins. However, the dealer costs can be quite high. 

“Holding physical gold in your hand can be reassuring, but very costly” says Ash. “Coins or small bars kept at home or even in a safe-deposit box carry a danger of emotional over-investment and thus inertia when you should take profit. Also, check your home insurance: depending on your insurer, keeping more than £3,000 of any ‘high value’ item might invalidate your policy.” 

Alternatively, you could buy physical gold, but keep it stored in a vault. BullionVault, for instance, looks after £1.5bn of physical gold, silver, and platinum for 75,000 customers around the world. This approach is more secure, but does incur storage fees.

A third method is to invest in a gold-based exchange traded fund (ETF). These are listed on stock markets and traded like shares, but often derive their value from gold prices using derivatives such as future contracts. 

“ETFs typically solve the cost problem compared to buying and selling coins or small bars, because they carry a much narrower spread,” explains Ash. “ETFs also solve the storage problem, charging ongoing fees of between 0.2 per cent and 0.5 per cent per year. You don’t however own any actual gold. Instead, you become a shareholder in a legal trust whose debts are denominated in bullion.”

A better alternative to an ETF may be a physically-backed exchange traded commodity (ETC), the value of which is based on owning gold held in a vault. The government-owned coin maker, the Royal Mint, launched an ETC product this week.

“One of the easiest, cheapest and more liquid ways to invest in gold is through an ETC that tracks the price of the asset,” says Lipski. “This means that they can follow the price of gold down as well as up. We think ETCs are the best mechanisms to gain exposure to the precious metal.”

Lipski recommends the iShares Physical Gold ETC, which has returned 18.45 per cent over one year and has an ongoing cost of 0.19 per cent.

With stock markets trading at record highs and uncertainty over how the global economy will perform in the future, it may be a wise investment to add a little bit of gold as insurance against the next dip of the rollercoaster.

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Main image credit: Getty

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