Mark Potter

The price of gold bullion has declined steadily in US dollar terms for some months since its peak last Summer. A decline in the value of the dollar relative to Sterling will have added an extra loss for investors reading this post, and that includes me!

Readers who own gold bullion may therefore be asking the question in the title.

Why own gold and what about Bitcoin?

I own gold bullion because some 9 months or so back, I wanted to have an asset that was not correlated with global equities and would retain value if the pandemic got totally out of control. Fixed income and physical property investments did not look like offering much value then (and they still don’t) and there was obvious demand for gold.

Gold is a commodity and generally commodities (which include cryptocurrencies like Bitcoin) don’t pay an income and won’t be worth more because an enterprise does well. The price is directly and only determined by supply and demand.

Because high value minerals like gold and high complexity assets like Bitcoin are hard to mine and bring to the market (for completely different reasons of course), the supply side is known to be limited. So in making an investment bet on such assets, one is always taking a view on the demand side of the equation.

What’s changed?

This is the key to working out the completely opposite path of returns for gold and Bitcoin over the last few months. We have less demand for gold (more on that later) and more demand for Bitcoin.

The latter has a new champion with a big fan base in the form of Tesla’s Elon Musk, who has invested shareholders’ cash into Bitcoin in a big way.

The other reasons for Bitcoin demand rising I can only guess, but I would suggest it is possibly our old friend ‘herd mentality’, plus a bit more of a reported positive attitude from blue chip investment houses, although not reserve banks!

The reduction in demand for gold can be attributed to several factors. The main one is that the pandemic risk is thought to be much reduced, so avoiding national ‘fiat’ currencies is less important. Another is that interest rates on US treasuries are slowly rising, implying a market expectation of inflation and/or a slowing of US government money printing in the mid-term – surely inevitable.

Although gold is an excellent inflation proof asset in the long run, it has no income yield. When risk free (as is the convention) assets like US treasuries also have no yield and could lose capital value on a rate rise, gold looks attractive.

When interest yields pick up, the short term investor would rather have the income now than the inflation proofing later, so money rotates away from gold to lower risk (now improved) yield assets.

If such investors exected a sharp rise in interest rates, they would hesitate to buy the fixed income assets, because of the anticipated capital loss, so the markets are telling us that they only expect gentle rate rises over a long period. There is some debate about that, but the collective psychology of the market is always right for the time being!

So, what to do?

One could take the view that gold is a useful core portfolio asset, offering security and diversity and over the long term is both a volatility damper because of the low or even inverse correlation with global equities, and it will serve as an inflation hedge. In that case, it makes sense to keep a modest asset weighting.

Should you invest in crypto currencies instead?

I am not qualified to add to the view of regulators and cental bankers who suggest that although these new assets are very similar in character to precious metals, the way they are traded is probably not unlike the trading of the shiny stuff back in the 19th century at the ‘gold rush’ sites. Some people made fortunes, some went on to control large parts of the market and most people were financially wiped out. In other words, retail investors ought to stay away for now.

Another point of view would be that the vaccine programmes are going well, Covid-19 infections are coming down, there will be no real double dip recession and instead a consumer boom will drive up prices and in time interest rates. That proposition would imply that owning equities, even though they are currently expensive in many markets, or even well selected property assets, is a better tactical (ie short term) option and both fixed income and conventional commodities are not likely to make money.

If you are of the latter more optimistic frame of mind, you ought to think about controlling volatility in other ways within an equity portfolio. Investing in infrastructure is something that comes to mind, given that we expect high levels of government spending, or adding heavier weightings to healthcare funds, perhaps? I am not sure I know the full answer at the moment.

As for me…..

You might expect me to tell you what I will be doing.

The answer is that I will not add to my physical gold holdings and as I have cash to put into the markets when I see opportunities, the relative weighting will go down.

Aside from that, I personally see no case for selling out, but my circumstances and portfolio will not be the same as yours, dear reader, so if you own gold, you need to make your own mind up!

I hope these comments help.