In­vest DIY: All that glit­ters is not gold

Tra­di­tion­ally, gold is seen as a safe haven within a port­fo­lio. But there is a bet­ter way to hedge against fall­ing mar­kets.

Finweek English Edition - - Contents - By Si­mon Brown

two re­cent data points got me think­ing about an as­set class I have never liked or ever in­vested in – gold. The the­ory is that when the world ends, gold will be the only as­set of value. But I have al­ways claimed that wa­ter and pump­kin seeds would be way more use­ful in a post-apoc­a­lyp­tic world.

Fur­ther­more, when the 2008/09 global fi­nan­cial cri­sis hit, gold fell from just over $1 000 per ounce to un­der $700 per ounce as ev­ery­thing was be­ing sold off. The is­sue here is that when mar­kets are fall­ing, and credit is dis­ap­pear­ing, peo­ple need to liq­ui­date some as­sets for cash.

Sure, they could sell their shares, which they did, but they also sold their “safe haven” as­sets. Dur­ing the cri­sis, there was nowhere to hide. Well… there was one place, but more on that in a mo­ment.

The first data point that got me think­ing was the mar­ket cap of the NewGold ex­change-traded fund (ETF), which has fallen from al­most R19bn in 2016 to a cur­rent level of un­der R12bn. Over that pe­riod NewGold is flat in price, so the drop in mar­ket cap is as a re­sult of hold­ers ex­it­ing their ETFs back to the is­suer.

In­ter­est­ingly, in­di­vid­u­ally gold and the rand have also been flat over this pe­riod.

The other data point was a Tweet from Char­lie Bilello, a di­rec­tor of re­search at Pen­sion Part­ners, in the US. He had data from Au­gust 2011 show­ing the then largest ETF in the world was a US-listed gold ETF with a mar­ket cap of $77.5bn, while the S&P500 ETF’s mar­ket cap was $1bn less.

Fast for­ward to last month and the gold ETF mar­ket cap was un­der $30bn and the S&P500 ETF had reached $275bn. In other words, in­vestors have been aban­don­ing gold and pil­ing into eq­ui­ties.

Now, in part this makes sense as gold is flat over the pe­riod and the S&P500 is up over 130% dur­ing the same pe­riod. No sur­prises that in­vestors have been mov­ing to where there is money to be made.

It is also im­por­tant that these seven years cov­ered by the Tweet have been fairly plain sail­ing for in­vestors as we have not had a global cri­sis such as we saw in 2008/09.

Maybe the case for gold as a hedge within a port­fo­lio is sim­ply no longer true. Make no mis­take: gold bugs are fum­ing right now and plan­ning their irate let­ters to the edi­tor. But the num­bers speak for them­selves. In­vestors have been bail­ing out of the yel­low, once pre­cious, metal.

But then what do we use to re­place gold?

The the­ory of gold in a port­fo­lio is an un­cor­re­lated hedge against a mar­ket melt­down.

Some­thing which, as I pointed out above, did not work in 2008/09. To be fair, as South Africans we should look at gold in rand terms – and this brings me to an­other point.

A way bet­ter hedge within a port­fo­lio is some hard cur­rency. When­ever we have a lo­cal or global fi­nan­cial cri­sis the rand weak­ens against the ma­jor cur­ren­cies.

So, hold­ing hard cur­rency as cash (in a bank) or even one of the Absa ETFs is­sued over US dol­lar, euro and pound ster­ling, would work ex­cel­lently – mov­ing higher as mar­kets are melt­ing down. Now sure, many will de­cry the use of fiat cur­rency and some would sug­gest hold­ing bit­coin.

But putting a few per­cent­age points of a port­fo­lio into

NEWUSD (the Absa

US dol­lar ETF) or off­shore in a US bank, would see at least a part of our port­fo­lio ris­ing as ev­ery­thing else falls. ■ ed­i­to­rial@fin­

Maybe the case for gold as a hedge in a port­fo­lio is sim­ply no longer true.

Char­lie Bilello A di­rec­tor of re­search at Pen­sion Part­ners

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