As an advocate of gold for most of the last 10 years but who has spent the
last 18 months or so viewing the yellow alternate currency as asset to trade
rather than hold, I’m asked frequently for my views on what has been
typically represented as much as 25% of my own portfolio holdings throughout
almost all of the 21st century, other than following ‘sell’ recommendations
issued in November 2011.
My colleague, Nic Craven, recently wrote that gold’s meteoric rise in price
from the turn of the century has attracted a great deal of interest from
investors, particularly as shares have been relative relatively flat in
comparison. Much of the argument for investing in gold reflects it being
seen as just another form of money, consistent with history going back to at
least 700 B.C. As a store of value, more limited supply means that gold
should be less affected by the gradual erosion of inflation - which has seen
the US Dollar lose 98% of its real value since the early 20th century.
Indeed, over the same timeframe, the price of gold in real
(inflation-adjusted) terms has nearly tripled. The value of gold as an
inflation hedge and a perceived safe-haven store of value make it attractive
when confidence in paper money falls dramatically, as well as deflationary
times such as during the great depression.
Over the long run this has led to a boom-bust cycle for gold, driven by the
traditional business cycle. This means that gold needs to be treated with a
balanced, somewhat contrarian view as an asset class like any other, with a
cautious approach when prices are high and perceptions of risk are lowest.
Opportunities are greatest when expectations for gold are low.
To date, our track record at managing this cycle has been extremely
successful for investors. In 2000, at the onset of the current deflationary
cycle, we recommended gold holdings for 10-25% of investor portfolios. At a
price of around $270 per oz., gold had significant upside compared to risk
assets such as equities and property, which looked relatively expensive.
Since then we have recommended several periods of profit taking when prices
had seemed to run ahead of themselves, which have limited clients’ exposure
to gold price declines. Since the 2011 sell recommendation we have profited
from range bound gold by selling when gold has approached $1800 per oz.
(Comex) and buying at or below $1600. Over this 13 year period, the
cumulative profit from these recommendations is a gain of +734% on original
Value as protection against equity
Gold’s performance vs equity markets can be another way to look
at its value, although the logic of the link between the price of gold and a
measure of the economy’s productive capacity is slightly more tenuous.
Despite being close to historic peaks in real terms, gold’s current price is
around 30% below its long-run average level against the Dow Jones Index.
Given our concerns about equity market valuations, however, we’d be
reluctant to interpret this too positively for gold, as it could equally be
another indication that stocks are overvalued or at least a combination of
gold under valuation and equity over pricing!
Arguably the more useful comparison of gold vs equities is the metal’s value
as a “disaster hedge”, as it tends to attract investors when uncertainty
about the real economy is greatest. Gold has historically risen in value
during more extreme share market selloffs, giving useful diversification
benefits alongside an investment in shares. However, the same doesn’t hold
true for all periods of market weakness. In fact, since late 2011 gold has
not delivered much in the way of protection from the gyrations of equity
markets, tending to rise and fall in lockstep with equities. Only recently
(since late 2012) has the correlation between gold and equities turned
negative again - but not in gold’s favour, as this has largely been through
gold prices tailing off while equity markets have rallied.
To be continued…
The above data and
research was compiled from sources believed to be reliable.
However, neither MBMG International Ltd nor its officers can
accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of
reading the above article. For more information please contact
Graham Macdonald on [email protected]