Gold holds an age-old at­trac­tion for investors, but first make sure you un­der­stand what role it can play in a long-term port­fo­lio.

Finweek English Edition - - FRONT PAGE - editorial@fin­ Schalk Louw is a port­fo­lio man­ager at PSG Wealth. By Schalk Louw

gold has a long and rich his­tory as a quan­ti­ta­tive mea­sure of per­sonal wealth. The queen of Sheba’s visit to King Solomon’s ex­trav­a­gant tem­ple of­fers an ex­am­ple of how far back this prac­tice goes. There are also count­less myths and le­gends, like that of El Do­rado, that still draw ex­plor­ers in search of the city of gold, and fairy tales like Jack and the Beanstalk in which the goose that lays the golden eggs changed his life for­ever. It’s not dif­fi­cult to see why gold has put a sparkle in the eyes of so many peo­ple over the years.

For cen­turies gold was also the stan­dard fixed ex­change rate be­tween coun­tries for in­ter­na­tional trade, but this came to an end in 1971 with the col­lapse of the Bret­ton Woods agree­ment. How­ever, it be­came clear that very few things could spoil peo­ple’s at­trac­tion to this com­mod­ity. And that is ex­actly what it is, just a com­mod­ity. Iron­i­cally though, more and more peo­ple are re­fer­ring to gold as a safe haven for investors. But if you were to ask any gold in­vestor just how safe this haven re­ally has been over the last 1 to 12 months, I doubt that the an­swer will im­press you (the SA Gold In­dex was down by 44% over this pe­riod).

The gold bulls def­i­nitely didn’t have a great month so far ei­ther, af­ter the gold price (in US dol­lars) dropped by 3.5%, and the lo­cal Gold In­dex by more than 7% (as on 9 March). This isn’t a new trend, but one that has been around for at least the last six years (gold price down by 35% in US dol­lars, and SA Gold In­dex down by 62% since the global eco­nomic re­cov­ery be­gan in 2011). Be­fore you rush off to buy some gold in this time of weak­ness, how­ever, let’s take a look at the big­ger pic­ture.

Noth­ing spe­cial, but...

There is noth­ing spe­cial about gold as a com­mod­ity, and there def­i­nitely isn’t any rea­son why it should be less volatile than other com­modi­ties such as plat­inum, cop­per or sil­ver. Com­modi­ties are, and al­ways will be, high risk in­vest­ments. The ad­di­tion of gold to your per­sonal in­vest­ment port­fo­lio def­i­nitely shouldn’t be taken lightly, nor seen as a safe in­vest­ment op­tion in any way.

But with this in mind, gold and other com­modi­ties ap­peal to long term, goal-based in­vest­ment port­fo­lios for one sim­ple rea­son: it is a tan­gi­ble as­set. These as­sets are use­ful be­cause they can pro­vide good hedg­ing against in­fla­tion.

If you were in­vested in gold for the last 40 years, your an­nual re­turn would have to­talled an av­er­age of 13% a year, which looks very at­trac­tive when com­pared to lo­cal in­fla­tion that grew by only 9.25% a year over the same pe­riod. Yes, there were times, some longer than oth­ers, where gold un­der­per­formed against in­fla­tion, but over the long term its per­for­mance has re­mained im­pres­sive.

I am not con­vinced that the un­der­ly­ing mines of­fer the same value as gold it­self, though. Here’s why: If you had in­vested R100 in gold (rand terms) 10 years ago, your in­vest­ment would be worth R328 to­day. If you in­vested the same R100 in the SA Gold In­dex, your in­vest­ment would only be worth a very dis­ap­point­ing R47 to­day.

Many po­ten­tial investors may feel dis­cour­aged by this, mainly be­cause it’s so dif­fi­cult to buy gold as a phys­i­cal com­mod­ity, but there is some good news. There are a few gold- and other com­mod­ity-based ex­change-traded notes (ETNs) listed on the JSE. For those who would only like to have ex­po­sure to gold price move­ments in US dol­lars (with no rand strength or weak­ness in­volved), the In­vestec Note (JSE code: GOLDEN) can be con­sid­ered, while Stan­dard Bank (JSE code: SBAG1) will pro­vide you with gold price move­ments in rand.

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