We’ve covered why investing in gold is important in previous posts, but since the recent surge in the gold price, we received many questions from our clients.
Here are the answers to some of our most commonly asked questions about investing in gold:
- Why is the gold price going up?
- Why do Stockspot clients all own the same percentage in gold, regardless of portfolio type?
- Why do you invest in unhedged gold rather than a USD hedged gold ETF?
- Why haven’t you increased its gold exposure further?
- Why do you invest in gold bullion rather than ASX listed gold mining shares?
- What could replace gold in a a balanced portfolio?
- Should I reduce my gold allocation given it’s at new highs?
Why is the gold price going up?
Gold has a low correlation to other asset classes
During the first half of 2020 share market volatility rocketed to levels not seen since the 1987 crash due to COVID-19, so investors were and are still looking for a defensive asset to protect their wealth.
Gold tends to be viewed as a safe haven, because when other assets like shares are falling, gold often rises. This helps to cushion the impact of share market falls.
As real interest rates go down, the gold price tends to go up
A “real interest rate” is the interest rate adjusted for inflation.
Even though there is a cost to hold and store gold and it provides no yield (i.e. income returned on an investment), so lower interest rates make it a more attractive option. When real interest rates fall, gold becomes appealing, since there is less opportunity cost (ie. missing out on yields from bonds etc…) to hold it.
The current low interest rate environment, combined with the potential for higher inflation due to the recent money printing by central banks, is a major reason for investors turning to gold.
Supply shortages make gold more valuable
The recent global pandemic has also had some impact on gold production, which has also supported the gold price.
Gold retains its purchasing power
Owning some gold has historically been an effective way to help preserve wealth. This is especially true in periods of inflation.
With governments around the world devaluing their own currencies through monetary and fiscal stimulus, gold becomes more attractive to investors.
Why do Stockspot clients own all the same % in gold regardless of portfolio type?
Our allocation to gold across all portfolios has been 12.3% since 2017 when we increased it from 10%.
We believe this is the right percentage in the current environment to complement the growth and defensive characteristics of the other assets.
While it may seem intuitive to have more gold in defensive portfolios, our analysis shows that if you have too much gold in your portfolio, you risk long periods of poor performance when gold isn’t doing as well. That’s why we keep our gold allocation consistent across portfolio types.
Why do you invest in unhedged gold rather than a US Dollar (USD) gold ETF?
Our clients hold gold in Australian dollars via the GOLD ETF rather than U.S. dollars which means clients own ‘unhedged’ gold. There are a couple of important reasons for this.
Unhedged gold helps to protect your portfolio against a devaluation of the Australian dollar.
One of the main reasons to own gold it to protect your purchasing power and defend against the debasement of your home currency. For Australians this is the Australian dollar. Therefore we don’t think it makes sense to hedge your gold.
Unhedged gold provides better diversification when markets fall.
A second reason is that the Australian dollar tends to decline more than the U.S. dollar when the share market falls. Owning gold in Australian dollars magnifies the defensive characteristics of gold in your portfolio. This is exactly what happened during the GFC in 2008 and COVID-19 in 2020.
There have been unhedged and hedged gold ETFs listed in the ASX for the last 9 years. Over that time the unhedged gold ETF (GOLD) has returned 88% in total whereas the hedged gold ETF (QAU) has only returned 27%.
Why hasn’t Stockspot increased its gold exposure further?
Strategic Asset Allocation (SAA) is about having an asset allocation that can weather different market conditions rather than trying to guess which asset is going to perform best.
Stockspot’s portfolios spread money across different investments that often move in opposite directions to each other. This has helped the portfolios weather the COVID-19 market volatility and deliver positive returns.
Increasing the amount of gold in our portfolios just because gold has performed well recently is not a sound strategy. Based on our modelling, a 12.3% allocation is the correct allocation for the current market environment. Our allocation is already significantly higher than almost all diversified funds who generally allocate between zero and 5% to gold.
Why do you invest in gold bullion rather than gold mining shares?
Gold mining shares/gold miners are easy to trade on the share market, but they don’t provide the same defensive characteristics as physical gold. They have higher correlation to shares, and will not always perform the same as physical gold because of operational decisions, hedging and capital management.
Many gold miners fell by 90% or more between 2011 and 2015 when the gold price fell from AU$1820 to AU$1320 (a fall of only 27%).
What could replace gold in a balanced portfolio?
Investors often discuss alternatives to gold, and the below assets come up as possible replacements for gold in a balanced portfolio.
While silver may seem as a suitable alternative to holding gold in a portfolio, it does not provide the same store of value given the wider scope of practical and industrial use. For example, during the GFC, silver was relatively flat, whereas gold was up close to 40%.
Some have suggested that assets like bitcoin could replace gold as a defensive store of value given the digital trust network it has created. This may be possible in the future however for now, cryptocurrencies such as bitcoin are significantly more volatile when compared to gold.
Should I reduce my gold allocation given the gold price is so high?
It’s tempting to make changes to your portfolio after one asset rises. This will happen automatically with rebalancing. Automatic rebalancing means you’re never be over-exposed to an asset after a strong price rise.