If you want to diversify and protect your portfolio from extreme volatility, a small holding isn’t a bad idea
Gold prices have been weak lately, recently falling below US$1100 ($1516) an ounce for the first time since 2010. However, a recent fund manager survey showed that gold sceptics are now outnumbered by those who see value, quite a dramatic change from the last few years.
The last time the optimists had a majority in this particular survey was 2009 — just before gold prices more than doubled.
Gold as an investment concept polarises people.
At one end of the spectrum you have the conspiracy theorists and those convinced the financial system is a giant house of cards on the verge of collapse.
At the other end, many think gold makes no sense at all. Warren Buffett is one of these, believing people should invest in assets that serve a useful purpose and generate income for their owners.
Gold has performed poorly over recent years, experiencing a 37 per cent decline during 2012 and 2013.
Prices are back at 2010 levels and during this same period, US shares have more than doubled and NZ shares are up 81 per cent.
However, the five years before that were quite different.
From 2005 to 2010, gold prices increased from US$425 to US$1090, an increase of 157 per cent. At the same time US shares delivered an 11 per cent return, and this was completely due to dividends.
Gold is seen as a “safe-haven” asset that does well when everything else is going awry. It increases in value when financial stability concerns emerge and when markets are volatile.
Gold is also seen as a store of value, so it performs strongly when people get worried about inflation.
High inflation erodes the value of money as purchasing power reduces, while gold tends to hold its value at these times, making it a good inflation hedge. Like many commodities, it is priced in US dollars so when the greenback is falling, gold prices go up as investors reprice it to offset this.
Those three key drivers were all in place leading up to 2010. The global financial crisis caused huge financial stability concerns, people were worried about future inflation as the US central bank printed money, and the US dollar was very weak.
Since then, the money-printing has stopped, the greenback is going back up as the US economy recovers and crises have been quickly defused before getting out of hand.
Looking ahead, there are mixed