Going for Gold?

Rules of Thumb

The idea of rules of thumb, or even ‘old wives tales’ is something treated quite seriously by some psychologists.  The suggestion is that they have come about on the basis of human experience, so insofar as they reflect maybe millions of observations over maybe thousands of years, they may have considerable merit.

One such rule of thumb for investment markets is that when people are nervous about the value of paper assets, they sell them and buy physical assets.  In other words, they sell shares and buy gold, other precious metals, classic cars, Bordeaux wine “en primeur” and so on.  Gold is widely recognised as an asset not closely correlated with shares in developed countries.

This is observably true, so I always checked any potentially short term market sell off against the direction of the gold price.  If the latter was not moving, it was a fair bet that the sell off was ‘technical’ and just short term reaction to news flow or repositioning by major market participants.

Recently, the price of gold bullion has risen sharply, suggesting a genuine fear is abroad and people are looking to hedge out risk.  Readers of my blog post a couple of weeks back will know that I believe is the true situation – market players are now accounting for multiple risks.

So buy gold then?

Well, if only that was easy.  Buying funds with the word ‘gold’ in the title may well just get you an exposure to mining companies, but that is just another form of equity share grouping.  Buying a gold ETF might work, but check it is one backed by actual physical gold assets.  Buying actual bullion  in a bonded secure vault is possible using a limited number of third party agents, but of course you have to pay fees.  Or you can buy small amounts of gold in the form of sovereigns and so on – but again you will have potentially high trading costs.

Personally, because I know gold is a commodity and it has no income yield, plus potential storage and insurance costs as well as being highly volatile in value at times, I don’t ever use it as an asset class diversifier.  Some very well resourced managed portfolio suppliers (7IM, for example) will use gold ETFs for diversification and that is to their credit.

Like that other commodity  Bitcoin, I would see gold as an asset for those who can afford to speculate and lose a lot if things go wrong.  For the average investor, it is a little too ‘quirky’ an asset to be of much use in portfolio diversification.