Gold is traditionally seen as a ‘safe haven’ investment that hedges a portfolio against stock market crashes because of its traditional lack of correlation to equities markets. Between September 2018 and the end of the year the price of an ounce of gold gained around $80 from $1200 to $1280 as stock markets underwent a significant correction. It reached a peak of $1341 in late February and has since dropped back to around $1280 as stock markets recovered.
Gold also gained over $60 the day after the shock Brexit referendum result as investors retreated to it while they waited to see how international financial markets would react. But detractors say that investing in gold is a waste of time. It’s price is volatile, its lack of correlation to equities markets is not consistent enough to offer a reliable hedge and it produces no income.
So what are the arguments for and against allocating a small portion of an investment portfolio to gold in the modern financial world? Is it still worthwhile?
The Case For Gold As An Investment Hedge
The first argument often put forward for gold is its ‘safety’. Savers can lose their shirts if banks go under as cash held is only protected up to a certain value and investments can also be lost if a company goes to the wall. But gold has ‘intrinsic’ value that can’t be lost in the same way.
The same argument can be put forward for bricks and mortar in the form of investment properties. Which also earn income and have shown much stronger capital gains than gold over the past few decades. But property is illiquid and can take a relatively long time to sell if cash is required, particularly in a slow market. Gold can be cashed in quickly and easily.
The next big argument put forward in gold’s favour is as a hedge against stock market crashes. The price of gold skyrocketed from around $280 to almost $1890 between the year 2000 and 2010, following first the bursting of the dotcom bubble and then the international financial crisis. Quoted in The Times newspaper, Adrian Ash of Bullion Vault Securities, a company that helps investors buy and store gold, states that since 1968 gold prices have gained over 96% of the 5 year periods over which the FTSE all-share index, which tracks every company listed on the London Stock Exchange, has returned a loss.
UK tax residents are not charged capital gains tax on any returns achieved from buying and selling gold.
The final argument can be given as adding another element of diversification to a portfolio.
The Case Against Gold
Detractors of the precious metal as an investment asset argue that it no longer displays negative correlation to equities markets. They point out that gold’s price fell along with stock markets during the 2007/08 international financial crisis.
Gold is volatile and lost around 40% of its value between 2012 and 2016 as stock markets went on a bull run – the severity of losses calling into question its ‘safe haven’ status. Another example is gold’s 65% drop in value over two and half years from its 1980 peak. It took over 28 years to return to that peak.
Perhaps the most loudly voiced argument against gold is that it doesn’t produce any income through interest and dividends. It’s a commodity and gains can only be achieved by its value rising. It’s possible to gain exposure to gold via stock market investments in mining companies, which also offer the prospect of dividends. And portfolio diversification which offers a hedge against inflation and stock market crashes can be achieved through other income producing assets such as real estate.
The Different Ways To Invest In Gold
For investors who are more inclined towards the arguments in gold’s favour as a portfolio allocation, what are the options available?
Investing In Gold Bullion and Coins
The most direct way to invest in gold is to buy the precious metal in its physical form – bullion and coins. You buy bullion bars or coins of a particular weight, the value of which are a direct reflection of the current spot price of the precious metal minus a small margin charged by the broker.
There is a good choice of online brokers who sell gold bullion bars and coins and investors can shop around for one with a strong reputation and smaller commission or ‘spread’ between their selling price and the current market spot price.
The gold bullion or bars bought this way can be securely delivered or picked up in person. Many gold brokers also often offer storage facilities where gold can be safely held for a small annual fee.
An alternative is to invest in ‘unallocated’ gold bullion. In this form investors never actually take physical possession of their gold, nor have a particular gold bullion bar or bars which they specifically own. They own the ‘right’ to a relative number of bars in a vault of many, without it being defined which are their bars. It can be compared to having money in a bank account. You have a balance and can go into the bank and withdraw cash up to that balance but don’t have ownership over any particular bank notes held in the bank branch where you have an account.
It is sometimes argued this form of gold ownership is not as secure as owning allocated bars or coins but would only ever be a practical consideration in a drastic set of circumstances. A plus of unallocated gold ownership is that storage fees tend to be lower.
Collectible Gold Coins
An alternative is to invest in ‘collectible’ gold coins. These are limited edition mints that are sold at a premium to the actual value of the weight of the gold in the coin. The advantage to collectible gold coins is that their value can rise considerably more than the relative rise in the spot price of gold if there is demand for a particular coin or set of coins. The disadvantage is that it can also fall in comparison to the original premium if there is not demand for that particular mint.
The value of the coin will never be less than the value of the gold in it but could still represent a loss on the original price paid as a result of the ‘collectible’ premium initially charged by the minter.
Perhaps the easiest way to gain direct investment exposure to gold prices is through gold ETFs. These are exchange traded funds that only invest in gold and whose unit prices closely tracks the spot price of the gold held. They can be invested in through a normal stock broking account and avoid the need to worry about keeping physically owned gold safe or paying for storage fees.
The downside is that as exchange-traded investment vehicles, the price of ETFs will, even if usually close, not exactly reflect the gold spot price. Investing in a gold ETF also transfers trust to the financial services company that provides the investment vehicle.
Equities With Exposure To Gold Prices
A final option for investors interested in gold exposure is to buy shares in stock market listed companies whose value is closely tied to the gold price. The most obvious example of this kind of company is gold miners. However, many gold miners do not exclusively mine gold and even if they do, the same mines will also produce some quantities of other metals commonly found alongside gold, such as copper.
The value of gold mining companies is also more complex than simply the current spot price of gold. The cost of maintaining mines, how concentrated gold deposits are, worker salaries, the risk of strikes, the cost of buying or developing new mines and management decisions are all also big influences on overall profitability and, therefore, the share price performance of gold miners.