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.
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. ■ email@example.com
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