Why should I consider investing in gold?

*This content is brought to you by Brenthurst Wealth

By André Basson *

The recent surge in the gold price (in USD) has some investors rightfully thinking about it, especially in a world where there is a lot of things one can worry about. I believe one should not invest in something that you don’t understand, the goal of this article is to unpack if and why gold can find a spot in your global portfolio.

What is gold used for?

Physically it is used in jewellery for the most part. In investing it is mostly used to calm the nerves. It surely is a very volatile asset class, which brings us to the point that the driver for the price is not future husbands buying the perfect ring, but investors moving in and out of risky assets. When investors worry about something and want to “de-risk” their portfolio, they move to cash and/or gold. Gold has always been perceived as a “safe haven asset”. When there are issues that worry investors, gold usually goes up. The market will always have bears (cautious or scared – favouring cash, bonds, or gold), and bulls (positive about growth outlook, favouring shares). The main use for gold in a portfolio is therefore diversification and a hedging tool during tough times. But looking at a 10-year graph one can see the gold price has not made investors super rich, it only delivered 6.4% annualized growth in USD. 

Source: Goldprice.org

Why invest in gold then?

I believe the best asset to give you growth over the long term, meaning 10 years plus, is equity. Investing in companies that can grow market share, innovate, and grow profits will eventually be rewarded with their share prices going up. Just on that basis I prefer equities over gold, but this is not to say every investor should be 100% in equities. This is a volatile portfolio and for investors that want some protection, it helps to add uncorrelated assets such as gold or safer assets such as cash and bonds. It can also be beneficial for certain people in retirement, as you don’t want to have 30 or 40% drop in value when the share market really takes a dive (which is certainly possible).

Why does the gold price rise at this stage?

The last month has been great for both shares and gold… which is a bit unusual. But different views make for a market – the bulls bought shares believing the Fed can start cutting interest rates next year as inflation drops in the US. The bears still believe that there might be a recession coming, and that there is a lot of other things that can be an ongoing problem. This list includes tensions in the Middle East, ongoing war in Ukraine, a struggling Chinese property sector, de-globalization and tensions between Taiwan and China. 

The beauty of gold in your portfolio

Humans often perceive bad news in overdrive. This is where calmness is important. Understand each asset class in your portfolio and know how to act (or sit on your hands). If there is a recession, we will get out of it again. If there is a war it will eventually end again. I cannot control external factors and therefore don’t act on it. Tough times don’t last forever as problems will eventually be solved, and then share prices will rise again. If your gold position helps you to stay invested (and not sell the shares in your portfolio at exactly the wrong time) or start to invest during a scary time (most often the best time to get in the market), then your insurance policy has proven its worth.  

Motives, expectations and how much to allocate

Don’t invest in gold because you are scared, I don’t believe being scared is a good motive for investing in anything. I have seen too many people lose money because they are either scared or greedy. Being cautious is a better motive: taking only the amount of risk you feel comfortable with is wise investing. A healthy expectation when using gold is that it can bail you out during a market crash but can also be a bit of a handbrake when markets rally. I would argue to use 5 – 10% for investors wanting a bit more comfort but combined with a decent exposure to quality equities. Investors that are happy to sit out market volatility can afford not using gold, but then properly diversify their equity portfolio within regions, industries, and investment styles. 

* André Basson, CFP® is head of Brenthurst Wealth Val de Vie, Paarl. [email protected] 

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