Week 4, 2017Gold is an investment idea that stirs up such strong feeling, in equal measure, amongst both its supporters and detractors. To some, it is the ultimate safe haven asset, whilst to others, it is an entirely useless yellow metal, whose only merit is that it looks pretty.

The price of gold is something that we regularly discuss with clients, especially when asked to consider putting it into their portfolios. So what is the truth about gold?

The supporters of gold point to the fact that it is a (some would say ‘the’) ‘go to’ asset in times of crisis, and that it is the only asset that ultimately does not fail. They also like to point out that gold has some industrial applications, which means that it is not an “entirely useless” metal.

However, the key point for the pro-gold lobbyists is its scarcity. The world’s known stock of gold is approximately 170,000 metric tonnes and, while new discoveries are still happening, the rate of increase is almost so small as to be insignificant. An often quoted point to illustrate what 170,000 tonnes looks like, is that if it were all in the shape of the typical gold bars, laid end to end/side by side, it would probably cover the pitch at Wembley or Twickenham (or whichever sporting stadium you prefer).

in times of economic fear, scarcity of supply and an increase in demand creates an upward price trajectory, which, on the face of it, is a self-fulfilling prophecy. The more the price increases, the more the pro-gold camp claim that the facts support their position.

For me, however, this still does not explain why there is demand in the first place. If we look at the anti-gold camp, the position can be summed up by a quote from Warren Buffet, who, let’s face it, has a not too shabby record when it comes to investing. “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and then pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

It is that lack of utility that its detractors point to as its main issue. Apart from limited industrial applications and its use in making jewellery, gold has no practical use. It has no income stream attached to it, as it cannot be rented or used to create something else.

The safe haven argument is also heavily disputed, given the volatility in its price. The chart below shows the change in the price of gold per Troy ounce since February 12, 2015. This is, perhaps, a legitimate argument if you consider a 35% loss in value is significantly more than you would expect to see from a ‘safe’ asset.


To quote Warren Buffett yet again: “(T)o be long on gold is to be long on fear” and, in my view, this gives us a clue as to how we can usefully use gold to our advantage within a portfolio.

As pragmatists, it does not matter whether we subscribe to the pro- or anti-gold theory. What matters is whether we can use tactical allocations to take advantage of rising fear, even if it is to capture just some of the rising value that this brings. As with every other investment decision that is where the real skill begins…

 

All that Glisters...

 

 

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