All that glitters: why hold gold?

  • Investment Insight
  • 5 minute read

Gold endures: the Lydians reportedly first used gold as money in modern-day Turkey around 700 BC and its psychological place as a store of value persists today. Gold is stable, portable, non-toxic, inert, rare enough and chemically rather uninteresting. As other elements and tradable commodities go, it doesn’t evaporate like oil or die like hogs. Over millennia, societies have attributed an eternal value to gold, exhibited in artifacts the world over. And unlike other precious metals, gold is golden.

Gold as currency

Gold has been used as a global currency. The Gold Standard Act in the US was passed in 1900 and established the metal as the only standard for redeeming paper money. Indeed, it was the abandonment of this standard by the UK in 1931 which saw Sterling devalue and the country eventually recover its competitiveness after the Great Depression. In 1944, the Bretton Woods Agreement was developed by the UN, with the US dollar seen as a reserve currency linked to the price of gold (which Nixon would ultimately abandon in 1973, leading to our current paradigm of mostly floating exchange rates).

Why hold gold?

As an investment, gold can be tricky to value and it bears no income. As a single stand-alone asset class, it can be volatile – the spot price peaked at US$1,898 per ounce in 2011 and is around US$1,223 today. Yet at a portfolio level, gold dampens volatility and its correlation to equities is closer to zero than other asset classes. Gold therefore helps to smooth returns in a diversified, multi-asset portfolio.

The real yield is the main driver for gold and dollar strength is a derivative of this. With inflation expectation in the US anchored in the 2.10% to 2.50% range, and the potential for a Fed 'pause' in interest rate rises, these could be positive for gold. A leveling off in global supplies, which had been on an upward trend for the last decade or so, together with an expectation that Central Banks will increase their gold reserves in 2018 for the first time in five years as they diversify away from US dollar reserves, may add further support.

Let’s get physical, physical

It’s event-hedging, and arguably crisis-hedging, where gold comes into its own. In times of crisis there are fewer opposing 'bull' and 'bear' views and investors seek refuge in a 'safe-haven' asset. This is why the 2.00% positions in our Close Tactical Select Passive (TSP) Fund range are physical and not synthetic. If you hold gold as the ultimate disaster-mitigation tool, logically your holding must physically exist. We use the Source Physical Gold ETC (Exchange Traded Commodity) which tracks the gold spot price through certificates which are physically backed with allocated gold bullion bars, complete with serial numbers, in J.P. Morgan’s London vaults. Other physical gold positions, held in different Close Brothers Asset Management portfolios, are further diversified and held in HSBC’s London vaults.

Gold standard: value added

We don’t have to look too far to spot risks on the horizon: from Brexit to deteriorating US-Sino relations amid an escalating trade war; from Iran to North Korea. To be clear, we are not gold bugs: our base view is for the current cycle to continue, being bolstered by solid Q3 earnings in the US. But we are responsible for protecting clients' investments from the unexpected, however improbable. Holding physical gold is another way in which we believe we add value to investors, day-in and day-out.

 

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