This guest blog comes from our friends at Moneycube.ie, a leading provider of online investment and pension advice. In it, co-founder Ralph Benson looks at the place of gold in your portfolio.
Going for gold is the 3,000-year-old investment strategy.
The yellow metal has some characteristics that investors just can’t ignore. When governments print money, countries fight wars, or political uncertainty increases, share prices can come under pressure. But demand for gold grows. This is the scenario that is playing out in 2022. So is now the time to invest in gold?
Why invest in gold?
Gold is seen as a traditional defensive asset – defending the value of your savings against inflation and an uncertain future. The price of gold has spiked over 15% in recent weeks as geopolitical uncertainty has risen – and 43% over the last five years.
More generally, consumer demand for gold has increased over recent years as people in emerging economies become richer. (Taken together, China and India consume around ten times more gold than the US each year).
And lastly, it’s hard to produce more gold. Mining for gold is expensive and slow. That combination of safety in a crisis, rising demand, and the difficulty of increasing supply make gold an attractive asset for many investors.
So how do I invest in gold?
There are three main ways to gain exposure to gold.
It’s possible to purchase the element itself, usually in the form of gold bars. But for most of us, this is impractical. Above all, it creates a storage problem! It’s unlikely to be covered by your home insurance, so you’ll probably need to pay a bullion supplier to mind them for you.
Using a fund makes sense for most investors. The easiest way to invest in gold is via a gold fund. Such funds hold physical gold bars in secure vaults and allocate some of that gold to you as an investor (typically using an exchange-traded certificate/ ETC from a reputable fund provider). The value of your investment is directly connected to the price of gold and is underpinned by the fund’s direct ownership of the yellow stuff. Funds focused on other precious metals like silver, platinum, and palladium are also available.
The third principal way to gain exposure to gold is to focus on companies that have exposure to the price of gold. There are currently a number of publicly traded companies that either participate in or facilitate the gold-mining industry.
But for investors who want a diversified, easy-to-manage portfolio, direct investment in gold miners is probably not the way forward. It brings new variables like assessing the quality of management and exploration risk. The simple aim is to build a position that is not correlated to your wider stock market portfolio, in a cheap and secure way. For most investors, a gold ETC fits the bill.
Sounds great… should I invest now?
Investing in gold can certainly be a good way to protect your existing wealth. But we believe it should only form a small part of most investors’ portfolios. While gold has its benefits as a hedge against inflation and uncertainty, it’s not without risk.
For one thing, the price of gold can go down as well as up. For another, gold doesn’t deliver the long-term growth opportunities that company shares can.
Gold previously peaked in 2011 in the wake of the financial crisis. It’s only up around 7% since then and had a fairly bumpy ride along the way. That’s a long way from the performance of the stock market, which has returned 10% every year since 1972, which is why MyWallSt operates a long-term buy-and-hold strategy via a diversified portfolio, instead of buying commodities.
But remember, the point of investing in gold is not to 10x your money, it’s to provide balance to your portfolio, and exposure to an asset that is less correlated with your wider stock portfolio. It’s the asset you are glad you own when everyone is selling everything. That’s why we say an allocation of 5-10% is appropriate for most investors.
If growing your long-term wealth is your aim, gaining exposure to a diverse range of company shares around the globe should be your main focus. But in volatile times, you’ll be glad of a portion allocated to gold.
Guest Author at MyWallSt
Moneycube.ie provides online advice to help people in Ireland take charge of their investments and pensions.