The golden touch – why gold is the asset to watch right now

Gold has always been appealing – Olympians compete for it, early civilizations equated it with gods and rulers, while the Incas referred to it as the ‘tears of the sun’. In fact, the price of gold increased by almost 30 per cent from the start of the year to the end of July1.

Why? Because, in the early part of 2016, investment market volatility was extremely high as commodity prices fell, sovereign wealth funds unwound positions to free up liquidity and equity markets globally were sold off. While initial shocks were mainly felt in January and February, uncertainty remained pushing investors towards gold as a form of protection and placing upward pressure on prices. In addition, the Brexit vote in June sent a short term shockwave through financial markets and subsequently pushed the gold price even higher.

In volatile markets we typically see an appreciation in gold prices

Continuing discussions around deflation and the increasing prominence of negative interest rates have left investors nervous about the debasing of currencies and they are increasingly turning towards value stores such as precious metals like gold. The price of gold (denominated in US dollars) has historically trended inversely to equity markets and the Australian dollar, and often functions as a safe haven for investors in times of market volatility, as seen this year. Given this inverse relationship with risk assets, the addition of gold to an investment portfolio can help to reduce overall volatility.

There are two easily accessible methods to gain exposure to gold

You can purchase shares in gold mining and exploration companies or buy physical gold bullion. In our view, the most effective method is accessing physical bullion gold through an exchange traded security (ETFS physical gold). Each unit represents approximately one tenth of an ounce of physical gold held in the HSBC Bank PLC vault in London. Holding gold in this manner has a number of benefits – it is administratively easy to hold and has a liquid market for investors to transact. The security also simply tracks the price of the commodity, protecting against the risks associated with investing in gold companies. As these companies are operators, they come with additional company specific risks and will not necessarily perform in a manner that is representative of the underlying value of gold. This is perhaps best evidenced through the example of Newcrest Mining (NCM), which across 2011 fell approximately 25 per cent following a series of operational and governance issues, whereas across the same period of time the price of gold increased approximately 10 per cent.

Consider a moderate exposure to gold in more growth focussed portfolios

At the time of writing, our global macroeconomic view remains neutral – as valuations across developed market equities such as Australia have increased, we have been diversifying portfolios into uncorrelated asset classes for some time. As a result, our recommended exposure to gold in more growth focussed portfolios remains modest, and given increasingly large cash holdings being recommended in conservative portfolios we don’t believe the safe haven asset is necessary in lower risk portfolios. However, if volatility persists and investor uncertainty becomes increasingly tangible, this may come under review.

This insight contains general financial advice and was prepared without taking into account your objectives, financial situation or needs. Any forward looking statements in this insight are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct. As always, your personal circumstances are critical when considering any financial strategy and seeking professional personal advice is highly recommended.

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Lyle Meaney

Managing Director & CEO – E&P Wealth

In his primary role as Managing Director, Wealth Advice, Lyle ensures all Investment Advisers and Analysts deliver the highest level of proactive service and advice in line with Investment Committee’s views on market conditions. All Investment Advisory clients have a dedicated Investment Adviser, who works closely with Dixon Advisory’s Superannuation Specialists, Financial Advisers, Estate Planners and Property Investment Specialists to deliver the best possible financial outcome. 

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