With gold near record highs, we explore its use in the everyday investor’s portfolio.
- The gold price is nearing record highs.
- As a safe haven asset, it can be a useful diversifier in your ISA or SIPP.
- Weakening dollar, economic slowdown, and reopening of China all positives for gold; but high interest rates make other safe havens of savings or bonds more attractive.
Isn’t gold only meant for teeth, wedding bands and Donald Trump’s gaudy apartments?
Gold is sometimes referred to as a ‘safe haven’ asset in financial markets, which means it tends to be popular during times of financial stress. For those who are nervous about stock market risk, it can serve as a pretty useful diversifier for your ISA or SIPP. Why? Because its price behaves differently to other assets, particularly stocks. For the conservative investor, this means it can sit very nicely alongside bonds and shares, as having a variety of lowly correlated assets means your portfolio has the potential to continue performing well in different market conditions.
Is gold risky?
You only need to look at the price chart below to see that it’s a risky bet. Between 1980 and 1982, the gold price fell by over 60%, and between 2011 and 2015, it fell by around 45%.
Laith Khalaf, head of investment analysis at AJ Bell, explores some more fundamental reasons:
“While gold traders often think in just days or weeks, everyday investors usually want an asset they can hold for years, and the long term case for gold is more nuanced. We can have a fair degree of confidence that an investment in the stock market will provide a decent return if held for ten years or more.
“Shares in companies produce cashflows generated from economic activity, which rises over time. Gold produces no cashflows and has few industrial uses, with demand mostly coming from jewellery manufacturing and investment, so it’s more difficult to pin an intrinsic value on the precious metal. Consequently, the long term direction of gold is pretty difficult to gauge because with no cash flows to speak of, sentiment will play a larger part in pricing. From its peak in 1980, the gold price fell by 33% over the next 20 years, and it took 27 years for gold to reach its former high, as the chart below shows. That’s a long period in the wilderness.”
What happening in the market at the moment?
Gold is closing near record highs, which ordinarily might put investors off. But there’s a number of reasons why some people think it’s time to buy. From a trading point of view – which looks technically at how an asset is trading in the market – we’ve just moved past the ‘golden cross’. This means the average rolling price over the past over the past 50 days has overtaken the average price of the past 200 days – see below. This is seen as a buying signal for technical traders.
Charts and technical signal can seem flimsy to long term investors though. Some readers might be looking for more fundamental reasons to buy gold.
Reasons to buy gold
- The dollar is weakening. Against a basket of other currencies, it has lost about 10% of its value since September. Given that gold is priced and traded in dollars, this is a positive for the precious metal’s value. The expectation is that the dollar could weaken further over the year as the US’s central bank – The Federal Reserve – begins to slow the pace of its interest rate rises, potentially even putting them into reverse.
- The economy is slowing on account of inflation – this is boosting the price of an asset that’s seen as an economic safe haven. But it’s worth noting that asset prices are forward looking, and you would’ve had to have been abandoned in the wilderness of Antarctica to be unaware of the global economic slowdown. Already in the price?
- China has kept its economy buttoned down on account of covid for the past 3 years, but this year has arrived with a lifting of draconian restrictions. Given it is a key market for gold, consumer demand should lift in lockstep. This may boost the price further.
Reasons not to buy gold
- The economic slowdown is unusual – interest rates are the cause of it and rising. Because gold has no cashflows, it means other safe haven assets such as savings and bonds look more attractive because their yields are rising all the time interest rates are.
- It is pricing near all-time highs. Buying assets at high prices is always fraught with risk when it comes to financial markets. But that’s not to say it can’t go higher.
How do I buy gold?
You could order it to your home but most people don’t like the idea of stashing high value coins under their mattress. Fortunately, there’s products available for your ISA or SIPP in the form of ETCs – Exchange Traded Commodities – which means you can shelter gains from capital gains tax. Much like ETFs for the FTSE 100 or S&P 500, ETCs represent a basket of gold investments.
Laith outlines the risks:
“Thanks to the arrival of ETCs, gold is now easily tradeable at the push of a button and these funds can be held within SIPPs and ISAs to protect profits from capital gains tax. Most investors should stick to physically backed ETCs such as iShares Physical Gold ETC. There are some funds which invest in gold futures rather than physical gold itself and indeed some which provide leverage to the gold price, amplifying its movements both positively and negatively. Such instruments are complex, risky and can have costs involved which are difficult to understand, so the vast majority of investors are best off sticking with plain vanilla gold ETCs, which simply buy and sell the precious metal itself.”