Some investors are averse to gold because, as Warren Buffett argues, it is an unproductive asset. Whereas equities and property can be useful and provide a return, gold “doesn’t do anything but sit there” and consequently has little inherent value, from Buffett’s point of view.
The World Gold Council, however, says investment demand for gold exceeded 1,500 tonnes in 2016. As well as being the second-best year on record for inflows to gold exchange-traded funds (ETFs), sales of coins and bars also finished the period strongly.
Despite Buffett’s objections that gold does not pay interest or dividends, many people are clearly ignoring his advice, including dispassionate buyers with objective and logical reasons for adding gold to their portfolios.
Store of wealth
To further understand gold investors, it is helpful to recognise gold’s function as an asset that withstands depreciation over time. For hundreds, if not thousands of years, humans have been psychologically attached to gold as a solid store of wealth.
Today, the overwhelming majority of gold is either in bullion vaults or as jewellery, as a protection against declining values among other assets such as cash.
This is a result of the fact that gold has historically acted as a hedge against inflation. As the famous anecdote tells us, an ounce of gold was enough to purchase a fine toga in Roman times and today is still able to buy a decent suit.
Professor Roy Jastram provided statistical evidence of gold’s property as an inflation hedge in his seminal work, The Golden Constant. His detailed examination of the English and American financial systems between 1560 and 2007 concluded that despite some considerable fluctuations, gold has held its value over the centuries.
The precious metal is an unparalleled wealth protector in volatile markets.
Diversification
Gold can be a diversifier because traditionally it displays a negative correlation to equities – it tends to increase in value when they decline. In this way, gold may play a role in mitigating overall losses in fluctuating markets.
This was apparent in the the global financial crisis. Many investors sold out of what they perceived to be higher-risk investments and piled heavily into precious metals in a classic demonstration of confidence in gold as a means of protecting wealth. The subsequent spike in the price of gold to more than US$1,900 an ounce.
Geopolitical tension
Gold has shown its ability to outperform other assets in times of geopolitical tension. Armed conflict almost inevitably pushes the gold price higher, as happened during the 1991 Gulf War and the subsequent Iraq War.
Currently, tensions surrounding North Korea and uncertainty over US President Donald Trump’s ability to push his growth agenda through Congress, threatens to undermine confidence in global markets. These are precisely the types of situations in which gold can become a sought-after haven.
However, even in this environment it would be deeply unwise for anyone to invest solely in gold. According to various portfolio theories, just a modest allocation is enough to provide an effective insurance policy in times of crisis. The work of Richard and Robert Michaud indicates that investors who hold 2–10 per cent of their portfolio in gold can significantly improve performance.
How to buy
Gold can be acquired in several ways, starting with direct ownership in the form of coins and bars purchased from a reputable supplier. A depository service will keep it safe and secure for a fee.
Another approach is to use an exchange-traded fund. These offer convenience, but it’s important to ensure the fund owns the underlying physical gold. Gold mining stocks provide an interesting alternative for ASX investors, although you are also exposed to the overall performance of the company.
ASX investors looking for a more focused approach could choose to trade gold via their stockbroking account with PMG, a warrant providing a right to 1/100th of a troy ounce of gold created by The Perth Mint.
As Australia’s precious metals specialist, the historic Perth Mint is a London Bullion Market Association accredited refiner, producing the nation’s official bullion coin program, and providing a trusted range of investment and storage solutions. Owned by the Government of Western Australia, which guarantees all it precious metals, the Perth Mint is renowned worldwide for the quality and purity of products.
Currently accounting for 2.2 tonnes of client gold held in the mint’s security vaults, PMG is the only ASX gold product that can be redeemed for physical Perth Mint bullion coins or bars, and the option to take delivery can be exercised at any time. But the fact that PMG is 100 per cent physically backed and fully Western Australian Government guaranteed is what truly sets it apart.
This article originally appeared in ASX Investor Update
