By Mark Atherton
You may have thought that uncertainty over Brexit and President Trump’s trade war with China would be sending investors rushing for the safe haven of gold. Yet the expected surge in enthusiasm for bullion has been the dog that did not bark. The price of gold has, in fact, fallen from more than $1,300 an ounce at the start of the year to less than $1,230 today, although it has spiked in the past ten days after a sell-off of US bonds sent tremors through world stock markets.
The pros
Josh Saul, the chief executive of the Pure Gold Company, a gold investment specialist, says that there has been a threefold increase in the number of people reducing their reliance on shares in their pension funds this year; they are buying gold bars instead. The number of people who have sold property and used some of the proceeds to buy gold has doubled.
Gold tends to do well when other investments are doing poorly, says Adrian Ash, director of research at Bullion Vault, an online platform for trading gold. He says that comparing five-year time spans over the past 50 years shows that gold rose in 54 per cent of the periods when markets went up, but in 96 per cent when markets went down.
He says that gold is attractive for other reasons. It has a number of industrial applications, including being a component in smartphones, and it has considerable consumer demand, especially in China and India. It is a commodity popular with central banks, including those of Russia, Turkey and India.
However, he says: “What really counts in the end is investment demand, where money comes into the bullion market from other investments, seeking safety. That’s what drove gold prices higher during the dot.com crash, the financial crisis and the weeks after the EU referendum shock.”
The cons
Gold doesn’t produce any income, interest or dividends, so essentially it just sits there, says Patrick Connolly of Chase de Vere, an independent financial adviser. He says gold prices have been volatile over decades, with investors either making or losing money over some relatively short timescales.
Mr Connolly says that gold typically has periods of sharp fluctuations, interspersed with long periods when it does very little. From its peak in 1980 the price fell 65 per cent in less than two and a half years. It took more than 28 years for the 1980 peak to be reached again.
Jason Hollands of Tilney, a wealth manager, says gold can provide some diversification, but most investors will have some access to gold already through their existing investment funds.”
Seven Investment Management, a wealth manager, has dropped the gold element in most of its multi-asset portfolios in favour of broader agricultural and industrial commodities.
Peter Sleep of 7IM, an investment manager, says gold can be unpredictable because its price is determined by factors as diverse as the strength of sterling and the US dollar, Chinese interest rates and the Indian wedding season. There are also storage and transportation costs when buying physical gold.
Brian Dennehy of Fund Expert, a fund research group, says he doesn’t think it makes sense to have gold as a permanent part of your portfolio.
His team analysed the returns on different types of US investments from 1977 to 2016. It found that gold produced poorer returns than shares, property or bonds. It had 15 years of negative returns, more than any other investment apart from commodities, suggesting it is not a reliable safe haven in all market conditions.
The alternatives to gold
Cash
Your money won’t fall in nominal terms, but the real value will be eroded by inflation because interest is close to rock bottom.
Absolute return funds
They aim to deliver above zero returns in all market conditions. However, many do not achieve their objective.
Income funds
They can grow your money in good times, while the regular dividends offer some mitigation of losses in bad times.
Commercial property funds
Offer a combination of capital growth and rental income, but can be illiquid.
Infrastructure funds
Steady income is the main attraction, coupled with, in many cases, the security of public sector money.
Source: The Times
