Is gold a safe haven for investors?

Gold is the world’s oldest investment asset and to its fans is a safe haven in difficult times. As the debate around gold heats up, Lawrence Gosling takes its temperature.

 Gold - A safe haven for investors?

To its critics, gold does nothing for investors as it does not pay any form of income in terms of interest or a dividend. But if you had put a small amount of money into gold at the beginning of 2018 you would have seen a price rise of over $100 an ounce on your investment and a healthy return. Contrast this with the challenging year major equity and bond markets had, with most finishing the calendar year lower than they started. Indeed the only major equity markets which made a positive return in the last calendar year were in Brazil and India – which for private investors may be too high risk.

So what is the ‘truth’ about gold?

Two sides of the story

Just before Christmas I asked two people on different sides of the equation for their views.

One was Ross Norman, the chief executive of gold dealer Sharps Pixley, which has a shop in London’s St. James where investor can literally walk in off the street and buy gold.

This can be in the form of coins, small ingots of gold, or more sizeable investments. He has been involved in the gold dealing markets for 30 years and has seen the highs and lows of the commodity.

The other was James Bateman, who is the chief investment officer of Fidelity’s Multi Asset range of funds, based in London, whose job is to safe guard investor’s long-term capital.

Norman is the first to admit that ‘predicting’ moves in the gold price is very difficult even for people close to the gold market. His argument for holding a proportion of gold long term as part of a private investor’s portfolio is that it becomes a store of wealth and outperforms on a total return basis the FTSE. The data supports his arguments.

Related: Why all that glitters may be gold in 2019 – A survey of investors predicts a rise in the price of gold this coming year.

He also says that when the political and economic environment is uncertain gold comes to the fore.

With the UK going through Brexit, the US economy slowing down and the global economy still facing uncertainty we are arguably in that environment, indeed some would call it Armageddon.

I asked Norman to answer some key questions about gold and his replies come on the following pages along with some investment funds that you can use to access the gold markets if owning direct gold is not for you.

And here is what Bateman is currently thinking: “Given the increased volatility in markets and heightened geopolitical uncertainty, markets are paying closer attention to gold than they have in recent years.

“At Fidelity Multi Asset, we use gold in portfolios both as a diversifying asset and more tactically when we are concerned that risk assets may underperform,” he said.

In Bill McQuaker’s Open Range of funds, he allocates between Growth, Diversifying, and Hedging assets depending on each fund’s performance target and his market views.

Since he has managed the Open Range, McQuaker has used gold as a component of his Hedging assets. In the Open Strategic Fund for example, he moved from a 4.8% position to a 9.6% allocation in gold across the final quarter of 2018, split roughly evenly between physical gold and goldminers.

“We typically rotate between gold and gold mining stocks based on valuations of the latter – i.e. whether they implicitly priced in a higher or lower gold price than today’s spot price,” he said.

McQuaker and other portfolio managers also sometimes ‘barbell’ higher risk exposure, such as emerging market equities, with gold as a ballast to offset riskier positioning.

In Eugene Philalithis’ Income Range, which is managed by allocating across Growth, Hybrid, and Income assets, gold is not typically used given the requirement for yield in the strategy. Nevertheless, the gold price is relevant in forming a view on overall market sentiment.

“While we do recognise the gold’s traditional status as a safe haven in times of market stress, we use our portfolio’s objectives as a starting point when deciding whether, and to what extent, we allocate to gold.”

The debate will rage on but it would seem to me that even a small percentage of a private investor’s wealth could be allocated if only for defensive reasons, and with many readers planning IHT issues then holding the commodity in physical terms helps on that basis.

Editor’s comment

It is a fact of investing that as we all get older, we get more cautious and conservative. It is natural – we have all worked and saved long and hard and we do not want to see the that wealth disappear.

Do you have to agree with an Armageddon view of the world to hold gold as part of your savings?

You do not, and your view of the world may be closer to something else someone in the gold market said to me: “Things do not feel great at the moment.”

Even that view may not lead you to invest in gold. For the last 30 years a defensive’ approach has suggested bonds, and if you had done that your return would have been very healthy.

But the capital preservation of bonds has gone, with the exception of index-linked, so if you are looking for a safe haven asset where do you go? For many, property can deliver that, but that is harder to access without switching a large amount of money and this then creates more risk.

The newer wave of peer-to-peer lending opportunities from companies such as Goji, or the Blend Network for example, or more established companies such as Downing Crowd, can give access to property and give a regular income.

But what about gold?

For the last 30 years – I have to be honest – I have struggled to see the investment value of gold. It produces no income in the form of an interest or dividends and it has limited uses other than jewellery and a small number of industrial uses.

In the last three decades the most regular reason to hold gold has been the appetite of Asian countries for gold jewellery, which in itself has not, for me, been a very robust argument.

I have to admit my opinion has changed, largely as a result of spending time with the chief executive of gold bullion dealer Sharps Pixley, Ross Norman. He is the first to admit predicting gold prices is difficult – and he has over 30 years of experience in the sector.

His argument, that gold is a store of wealth and if held for the very long term can outperform major equity markets such as the FTSE, makes sense. He makes the point that many of us have an amount of cash as part of our savings and the value of this is eroded over time by inflation. Gold has outperformed inflation.

From a macro perspective it has been interesting to see China becoming a major buyer of gold in the last few years, as well as having been the largest producer of gold
having overtaken South Africa a decade ago.

India’s Central Bank is also a big buyer, and Germany’s Bundesbank has long held the asset. Norman does not put these facts forward as reasons for private investors to
buy the metal, he cites it as examples of reputable long term investors.

You might sum it up as this: if it is good enough for some of the world’s most important countries, then maybe it is good enough for us as private investors.

What I have learned looking at the gold market properly is that it is worth having an open mind about all areas of investment.

I may just dip my toe in the gold market with the purchase of a coin or two as investments for my children and great children.

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