THE ROLE OF GOLD IN YOUR PORTFOLIO
Gold holds an age-old attraction for investors, but first make sure you understand what role it can play in a long-term portfolio.
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.