Investing in Gold

bowlhead99

Sailtheworld said:

When I rebalance I have no idea whether I'm selling high and buying low - neither do you. All you know is that one asset has grown faster than another and you're taking steps to bring them back into line whether by buying more of the poorer performing asset and / or selling a better performing one. I rebalance on the 10th April - it's purely mechanical and based on past performance rather than a view on the future - it's risk that's being rebalanced because that's something we can manage.

Yes, you are doing it to manage your risk, and the positive side effect is that you are 'selling high' the assets that have delivered growth and 'buying low' the assets that have delivered less growth or negative growth. You say you have 'no idea' whether you are selling high or buying low, but the technique ensures that if things do happen to be particularly high, you will definitely be selling more of them, and if other things happen to be particularly low, you will definitely be buying more of them.  

If you are rebalancing between low or negative-correlation assets, you benefit from the diversification benefit of this 'sell high buy low'. If the assets are mostly fully correlated, you don't.  For example, if there are two banks offering good interest rates and one is offering 4% (but adjusting it for base rate changes from time to time) and the other is offering 3% (likewise), you will not get a performance /risk benefit from 'diversifying' your £50k across the two accounts and making an effort to maintain a 50-50 allocation by periodically rebalancing your portfolio away from the 'high performer' to get more of the lower-paying account.  However if you were holding bonds and gold (which are perhaps only 50% correlated) or equities and gold (which are sometimes close to zero or negatively correlated) you could see some benefits to volatility or risk/reward.

Ed comes at this from a slightly different viewpoint because he doesn't really worry about how gold performs over the long term as, say, a 5% diversifier because he has a strategy which allows him to spot when gold is good value against shares and vice versa. This is a buying low selling high strategy - rebalancing isn't a requirement if you have this skill so let's not confuse the two.

I'm not saying Ed has a good strategy or has called the market right to go heavily into gold at the percentage allocations he has said he wants to take. However if you are willing to accept that gold can be a useful addition to a portfolio (for diversification benefit with natural buy-low sell-high concept) then it is not a huge logic stretch to imagine a portfolio (that had something greater than a 10% target gold allocation) that was being periodically rebalanced at certain intervals, and think that now may be a time to be selling equities and tilting the portfolio back towards your target gold allocation (and target allocation levels in many models can be a dynamic allocation rather than static, based on external data). Albeit, his target gold allocation at certain points (such as now) is more than a typical long term investor would consider.

He's also advocating gold in a portfolio as a diversifier because it improves returns - it doesn't. The 15 year study he offers as evidence is gold vs a portfolio containing 40% bonds with an end date of 31/03/2020. It's a bias obviously because the study is fundamentally flawed - pick a date three months before or 3 months after and the 'gain' would disappear or just pick a world tracker with dividends reinvested.

Clearly the 'study' is part of marketing that gold investment product. However, if it is trying to show you the effects of annually rebalancing a mixed asset portfolio with or without their product, you can't criticise it for using a time period of "all calendar years the fund has existed, and this year up to the most recent quarter end for which values are available".  Picking a date 3 months after would either involve cutting short the data set - to start it later or finish it earlier -  or making some crazy guesstimate of what the figures for 30 June 2020 would be when that data isn't available. 

When looking at the effect of adding another asset class into a mixed asset portfolio it seems entirely valid for that mixed asset portfolio to be the type of portfolio that a professional investor (such as institutional pension fund) or a knowledgeable / advised retail investor might hold.  To look at the sample mixed asset index portfolio they used (which they footnote as hypothetical only and not a recommendation): if they had instead stripped out all the bonds and alternatives and only left the global equities (MSCI AC World) they would be monitoring a portfolio that suffered a 55-60% drop in values in USD during a ~18 month period during the global financial crisis. Most investors don't have anywhere near that risk tolerance for their retirement planning or medium term objectives and so it's entirely reasonable to use a 'proper' portfolio with a blend of asset classes when making their point.

This is not to say you should agree with all the points made by people make in sales pitches when trying to sell their products. However, sometimes it is worth considering what they have to say. For example, they say:

 When building a multi-asset portfolio, investors must consider not only the potential or forecasted risk-return characteristics of a particular asset class, but also how that asset class or market segment behaves relative to other investments and the impact on the portfolio as a whole. Although many investors tend to focus on constructing portfolios with asset classes offering high forecasted risk-adjusted returns, there are potential benefits to including asset classes that move differently relative to one another. A low correlation between the asset classes in a multi-asset portfolio can potentially help lower portfolio volatility and therefore, all else being equal, increase diversification and enhance the overall risk-adjusted return of the portfolio. 

So, IMHO there is nothing 'wrong' in holding a small amount of gold in a portfolio for 'diversification benefits' even though as mentioned elsewhere it does not physically grow or provide an income and costs money to store and insure. I would not be holding it as a means of improving outright performance, and I don't share Ed's insatiable hunger for it at the expense of a good dose of 'proper' investments -  but it is feasible that adding a bit can enhance risk or volatility-adjusted performance against a mixed asset portfolio of stocks/bonds/other.

Sailtheworld

Thanks Bowlhead (just clicking the thanks button doesn't seem enough when you've taken the time to reply in such detail).

I don't agree that rebalancing is a buy low sell high strategy.  All you're doing is adjusting the portfolio to get it to match your risk profile. This is based on past performance and an agnostic view is taken on future movements other than you expect / hope for a higher return from higher risk assets.

Rebalancing can be buying low and selling high but many other combinations are available depending why the balance has shifted and how you decide to rebalance. 

In terms of gold it can be a diversifier but it's correlation with stocks seems quite difficult to pin down. It's generally negatively correlated except when it isn't.

DiggerUK

How can a straightforward  question, in clear plain to understand English, generate such a lot of overcomplicated responses. 

Gold is an inanimate elemental metal, get over that simple reality.

OP. "I am thinking about investing in some gold to diversify my portfolio a little, I don’t really wish to physically hold it for security reasons. After some research I have come across SGLN ishares physical gold which invests in the spot price of gold, this seems like a good way to invest. Do many other forum members invest in gold, if so what are your preferred methods?? Thanks in Advance" 

Sailtheworld

Well SGLN seems like the perfect vehicle for a diversifier assuming the OP isn't planning to use the gold to buy guns, ammo and baked beans. It would be a bit boring if all threads ended at post 2 though.

shaun_from_Africa

pioruns said:

Thanks.

Gold turned out to be the WORST investment, right next to silver, when you look at broader timescale. 

I'm more than happy with the gold I've purchased.
Krugerrands purchased in 2008 for £475 which I could sell today for £1320.

Prism

shaun_from_Africa said:

pioruns said:

Thanks.

Gold turned out to be the WORST investment, right next to silver, when you look at broader timescale. 

I'm more than happy with the gold I've purchased.
Krugerrands purchased in 2008 for £475 which I could sell today for £1320.

The return of gold over the last 12 years hasn't been bad but still worth putting in context. It has been a slightly better investment than bonds have been but a considerably worse investment than equities, which pretty much follows long term trends.

markj113

My gold holdings are up 30% since May 2017 and thats comparing gold+premium vs current spot price only.  I have some higher premium coins that appreciated significantly more that spot so actual gains will be slightly higher.

itwasntme001

markj113 said:

My gold holdings are up 30% since May 2017 and thats comparing gold+premium vs current spot price only.  I have some higher premium coins that appreciated significantly more that spot so actual gains will be slightly higher.

How much premium are you adding?  You hold just physical bullion?

markj113

itwasntme001 said:

markj113 said:

My gold holdings are up 30% since May 2017 and thats comparing gold+premium vs current spot price only.  I have some higher premium coins that appreciated significantly more that spot so actual gains will be slightly higher.

How much premium are you adding?  You hold just physical bullion?

Premium varies by coin/bar.  Some items were picked up as low as 2.5% over spot (sovereigns and krugerrands) and other items I have are numismatic coins such as a set of Escucdo cobs (real pirate doubloons) from the 16th century under king phillip II of spain's reign with are worth a few hundred % over spot.

I hold physical gold and silver.

83705628

Gold isn't an investment it's a metal. You can buy it but don't assume it's going to generate a return.