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Gold in them thar portfolios?

Ian MuirheadIan Muirhead, Chairman, SIFA

During periods of market uncertainty, investors often make a beeline for the perceived safety of bonds, cash, or gold – and, amid meagre returns on bonds and cash, demand for gold has increased. But is gold an appropriate asset for the typical investor?

  • Gold is not necessarily suitable for private investors, although it could form a small part of a diversified multi-asset fund
  • Gold bullion is expensive; a cheaper approach is to buy gold via an exchange-traded fund (ETF)
  • Gold generates no income or interest, but does provide some protection against inflation

The traditional ‘safe havens’ in times of uncertainty for investment markets have been bonds, cash and gold. However, with bonds and cash currently offering negligible returns, concerns about Brexit, the economic slowdown in China and doubts about the strength of the US economy, professional investors are, perhaps unsurprisingly, favouring gold.

George Soros, the billionaire who famously ‘broke the Bank of England’ by betting against sterling in 1992, and who has a knack of calling markets, has been an enthusiastic buyer of the precious metal.

Meanwhile, the Royal Mint, the Government body which is responsible for “minting” Britain’s coins, is offering investors the opportunity to invest their pension pots in gold.

So, is gold a market in which typical investors should be interested? The answer, probably, is “no”, except to the extent that gold may form a small part of a well-diversified multi-asset fund.

Buying gold in the form of bullion is expensive. There is a buyer’s premium of around 1.5%, and a 1% charge for selling. Then there is the cost of storage and insurance, costing perhaps £300 per year.

The alternative way of gaining access to the value of gold is via a security such as an Exchange Traded Fund (‘ETF’), which would carry a cost of just 0.25% plus platform charges and broker fees. An ETF could even be held in a self-invested pension plan. Indirect ways of investing in the value of the metal would be to buy shares in gold mines or bullion dealers.

And what about the return? Gold produces no interest and no income, and the only means of profiting is by means of capital gain – which will be subject to capital gains tax. However, gold does have the advantage of being a physical asset, and as such provides some protection against inflation.

Over the past 20 years, the gold price has risen by more than threefold, but gold bought at its peak in 2001 lost 25% of its value over the following five years.

These figures demonstrate the extreme volatility in the gold price and why it is a market for the professionals. Although stashing away a gold ingot may appeal to some squirreling instincts, gold ranks alongside fine wine and fine art and classic cars as an indulgence rather than an investment.

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