Sheridan Admans, investment manager at The Share Centre looks at the arguments for and against buying gold, outlining how the performance of the precious metal has helped to protect investors’ portfolios during the recent volatility.
The arguments against owning gold tend to oscillate around the fact the physical asset does not pay a dividend or interest, it is difficult to value, and its long-term returns are poor.
Despite this, we still hold a near 10% exposure to the metal across our multi-manager portfolios and believe we will likely maintain the position for a while to come. There are a number of reasons for this.
Safe bets on gold
There are several characteristics to gold that have made it an important component of investors' portfolios during the recent period of volatility, driven by the global coronavirus pandemic.
The first is that it has been found to provide a hedge against inflation, meaning that as global economies have seen inflation rise, gold has held its value.
Second is the impact that lockdowns have had on gold supplies; transport of gold bars has severely reduced, meaning there is more demand than supply, which has pushed prices higher.
Thirdly, and perhaps most importantly, is the historic competition between gold and government bonds for the title of "best safe haven".
The persistently low bond yield environment we have seen of late, driven by widespread central bank experimentation with negative rates, has made gold even more attractive to investors.
Gold might not pay an income but it is more attractive than bonds that are returning negative yields.
For investors with portfolios exposed to gold, the shock of recent market movements will have been somewhat absorbed by these holdings.
We also have a positive position towards mining stocks with a metals focus, which will also be strong investment options as the global economy begins to emerge from the current crisis.
Metals prices have been far less impacted by the volatility than other commodities, such as oil.
In addition, metals mining companies have been consistent in their payment of dividends throughout the period so far, reinforcing the income opportunity they represent for investors when other options are increasingly limited.
The valuation question
As an investment, gold is difficult to value as it has no cash flows and does not contribute to economic growth. Maybe then it should not be valued as an investment but as a currency?
After all, before fiat currencies, gold was the standard by which paper currency was once valued.
The devaluation of currencies should be a tailwind for gold. Since August 2018 to February 2020, gold has returned c.39% or an annualised rate of c.21.9% in dollar terms.
Another way of looking at this is that gold has appreciated against the dollar by c.30% in the last year in dollar terms.