Client questions

Gold would have been a fantastic investment in 2009. Should I move some of my portfolio into it now?

You are not the first client to ask us we think of gold as an asset class. Gold has certainly received a lot of column inches over recent months and the financial pages seem to be littered with adverts for investment schemes which give you access to this precious metal.

Warren Buffett famously advised investors to “Be cautious when others are greedy; be greedy when others are cautious". If you were to follow that rule, you wouldn’t invest in gold right now. Sadly, in our experience, most investors tend to buy into an asset class when it has already had a good run. Technology, commodities and commercial property, are all good examples of this from the last 10 years.

With reference to gold, he is also quoted as saying:

"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

Our view on investing is that for each aspect of a portfolio, there must be some reliable method for it to generate an expected return.  Equities, fixed interest and commercial property do that as they offer investors a yield and therefore some intrinsic value. Gold, like other commodities, has no such mechanism. Instead, its price fluctuates in line with supply, demand and speculation.  As with other assets that produce no income stream which can be valued and thus projected into the future, prices tend to be volatile. The notion that gold is a “safe haven” seems illogical. Any asset that can move by well over 25% in a calendar year can’t be safe. Those individuals who held gold in the early 1980s will remember its collapse from around $850 to around $300.

As Financial & Investment Planners it would be difficult to explain to a client that we recommend they put money into something that has no known expected future return (speculating) at the expense of something that does (investing). In fact, the nature of speculating is such that you have to make your own decision on it, and live with that decision, rather than relying on someone else’s advice.

That said, there is nothing wrong with holding gold, just as there is nothing wrong with buying any other asset that has no expected return, such as stamps, art or fine wine. It diversifies your asset base and thus can reduce the volatility of the overall portfolio. Therefore, you need to consider why you are holding it. If you are investing in gold because you believe that the end of the world is nigh, then it would seem sensible to buy real, physical gold rather than “paper gold” via a fund. And, if you are buying real gold it would be better to have this somewhere that you can access it easily rather than in a bullion vault somewhere. In fact, in that scenario, I’d argue that you would be better off buying a shotgun and a thousand tins of corned beef.

If you are doing it to diversify your portfolio, that’s fine as long as you understand that there is no reliable way to “model” the expected future return and thus the impact that this will have on your portfolio.

Evolve - January 2010