Investing in Gold

2unlimited91

I don't hold any gold, but if I did, I'd have a permanent target percentage of my portfolio to be in gold, and would keep near-ish to my target as part of rebalancing (which I already do, for the asset classes I do hold). According to the historical data, adding gold to a portfolio in this way can be a useful diversifier.

I wouldn't buy gold for any temporary reason. It can be more or less effective as a diversifier in different periods; we don't know whether it will be more or less useful in the immediate future than it generally is. Calling in advance when it will be a useful diversifier may be just as difficult as simply calling when gold will go up or down. I would always assume I can't do any of that.

Bonds are still a useful diversifier, if you mean the ones with least credit risk (i.e. gilts, for UK investors). Bonds with higher credit risk are usually positively correlated with equities.

Sailtheworld

There's no evidence people can tell ahead of time whether bonds or equities will be better value so, unless you're building a family dynasty, gold is just a diversifier. It's an unreliable store of wealth and an unreliable hedge against inflation.

There's maybe something about gold being useful in a crisis but it's still a bit vague and does need some skill to work out what's a crisis and what isn't. If its recent gains are due to such crisis protection then a covid-19 vaccine would torpedo the price.

bowlhead99

aroominyork said:

But that raises a question of whether gold should only ever be bought to "never sell... hand it down the generations", or do people sensibly hold it as a diversifier 

Although I'm sure we are all envious of those families with a swimming pool full of gold coins in which to bathe... if the intention is to hand something down the generations, a portfolio of stocks - or more usefully, shares or units in an investment fund, because individual stocks can become worthless - would fit the bill better due to better long term growth potential versus a commodity.

So as something held for the benefit of the current generation rather than future generations, its main purpose would be a diversifier.

Ideally, diversifiers should have income and/or growth potential in their own right (i.e. equity dividends and or value growth from a share in a profitable business, or an agreed rate of interest on a bond with growth potential on the side).  Gold doesn't have fundamental growth or income potential because it sits there at the same size and doesn't pay an income (instead costing money to store and insure). However like some other commodities it does have speculative value so can go up in price per ounce (and that speculation value can be sufficient to offset inflation over some periods), and it can have a negative correlation to other asset classes from time to time. The negative correlation (though unreliable) is something that can make it more useful as a diversifier than cash.

So, no harm in having a few percent of your portfolio in it as a diversifier if you are looking to reduce volatility rather than go for all out growth.

EdGasketTheSecond

aroominyork said:

I'd buy an ETC. I have no interest in storing gold. But that raises a question of whether gold should only ever be bought to "never sell... hand it down the generations", or do people sensibly hold it as a diversifier which they might change to different asset types depending on how the economy looks, ie if bonds become better value or equities don't have Covid hanging over them?

Ideally buy gold when it is cheap compared to other investments (use measures such as S&P500/Gold chart to determine if, for example, gold is cheap or expensive compared to stocks) and sell when it becomes expensive and revert to what has become cheap e.g. stocks, real estate, general commodities or whatever you are considering buying.

In a high inflation scenario gold performs well compared to stocks and extremely well compared to cash. It has also been shown that portfolios containing 10% gold perform better than those without the gold.

Sailtheworld

I've just plotted the price of gold vs a total return index (Wilshire) and over 10, 30, 50 & 100 years gold has been trounced. Even if you didn't reinvest dividends and spent them you'd still be left with a bigger pot over 10, 30 & 100 years and had a better lifestyle in the interim.

I don't know where it's been shown that portfolios containing 10% gold perform better than those without but just a rudimentary check shows this would be a flawed analysis.

EdGasketTheSecond

Sailtheworld said:

I've just plotted the price of gold vs a total return index (Wilshire) and over 10, 30, 50 & 100 years gold has been trounced. Even if you didn't reinvest dividends and spent them you'd still be left with a bigger pot over 10, 30 & 100 years and had a better lifestyle in the interim.

I don't know where it's been shown that portfolios containing 10% gold perform better than those without but just a rudimentary check shows this would be a flawed analysis.

No need to plot it as the charts are readily available but good to see you are doing some research even if only to prove me wrong.

Have a read of this; you'll  have to google: "the role of gold in today's global multi asset portfolio - state street global" as its in pdf format and I can't attach the document or get a link to it but its the first result that comes up. It shows case studies of having 0,2,5, and 10% gold in a typical portfolio. The annualised return with 10% gold is 5.34% compared to 4.88% without. I'll leave you to work out why that is.

Sailtheworld

It’s because the authors (sellers of gold) picked a 15 year time frame which happened to finish at the end of March when equity markets were down and gold was riding high.  It’s the ultimate in cherry picking.

Also their multi asset portfolio was only 35% equities and 40 odd percent bonds. Low risk = low yield. It’s fairly obvious that over just about any reasonable timeframe using available indexes rather than hypothetical biased portfolios that gold, although diversifying, reduces returns. Gold struggles to outperform the S&P; if dividends are reinvested it’s nowhere.

If a dunce like me can spot these things after a 5 minute skim read I’m surprised you didn’t.

EdGasketTheSecond

I actually dont believe that is the entire story because a good chunk of the case study was over the period when gold was in a bear market from 2012 to 2019. It actually performs better because gold is negatively correlated with the other assets and so when gold is doing well, becomes more than 10% of the portfolio and gets sold when its high and bought back when its low (less than 10%) improving performance. Exactly what you should be doing to raise yourself above dunce level.

[Deleted User]

Sailtheworld said:

I've just plotted the price of gold vs a total return index (Wilshire) and over 10, 30, 50 & 100 years gold has been trounced. Even if you didn't reinvest dividends and spent them you'd still be left with a bigger pot over 10, 30 & 100 years and had a better lifestyle in the interim.

I don't know where it's been shown that portfolios containing 10% gold perform better than those without but just a rudimentary check shows this would be a flawed analysis.

Can you please share the chart you plotted or point where we can create one?

Sailtheworld

You brush over clear evidence that a total return index trounces gold in almost all circumstances in favour of marketing research which uses suspect dates and a cherry picked portfolio. Beware of bias.

Of course there’s no argument that buying low and selling high and repeating is a good skill to have whether we’re talking about gold or any other asset. Don’t forget it’s a skill most don’t have.

Which reminds me you still haven’t shared the ratio of gold to equities when it should be bought and sold.