All that glitters is not Gold

Posted by: Swindells FP, on October 2, 2012.

We are occasionally asked by prospective client’s whether we include Gold in investment portfolios as insurance against falling share prices or to counter inflation.

Our Investment Policy Statement gives full details on how Swindells Financial Planning, IFAs based in Seaford and Uckfield, Sussex, believes investment portfolios should be constructed, but in summary in building our portfolios we need assets that have drivers of real returns, something we can rely on, something with evidence to support their inclusion, such as new profits or wealth being generated though the activity of the underlying mechanism, i.e. a company. Whilst this is erratic it is more certain than the return from gold or indeed any other commodity which is based on nothing more than supply and demand.

Gold and equities have little correlation normally but in time of market crisis Gold has negative correlation which would benefit a portfolio at that time. However the fact is an asset class with nil expected rate of real return can only hinder long term returns of a portfolio. The idea that its inclusion will reduce the downside is fine so long as you do not mind long term returns being lower. But we can do this more reliably by choosing a lower risk portfolio, rather than including an asset than at the moment is at an all-time price high.

From 1980 to end of 2007 gold made a real annualised return of -1.7%, doubtless this would be worse via a fund with its inherent costs. The FTSE All share over this period was 9.5%.

Annualised returns of gold and FTSE all share

Warren Buffet makes a typically polemic argument on gold.

“If you moulded all the gold in the world into a cube, it would be about 68-feet per side. This is four feet shorter (and considerably wider) than a tennis court. As Buffett observes, it would fit comfortably in the middle of a baseball infield. The value of all that gold at today’s prices, Buffett observes, would be about $10 trillion.”

As for its merit as an investment, Buffett observes the following:

“The cube of gold will produce nothing in the next hundred years (or, for that matter, thousands of years). The cube of gold will not pay you interest or dividends, and it won’t grow earnings. You can fondle the cube, but it won’t respond. If you had $10 trillion sitting around, Buffett further observes, instead of buying the cube of gold, you could buy all the cropland in America ($400 billion-worth) and 16 Exxon-Mobils. And you would still have $1 trillion of “walking-around money.”

Over the next hundred years, your cropland and Exxon-Mobils would produce trillions of dollars of dividends (the size of which would be adjusted for inflation), and you would still have them at the end of the century, at which point you could probably sell them for vastly more than the $9 trillion you bought them for.”

One further point to mention is that it is strange that we never get questions about owning Technetium, Rhodium or Platinum; the three most expensive metals on the planet or even Rhenium one of the rarest elements. There is something about Gold that mesmerises investors and it is Swindells Financial Planning’s role to provide you with guidance and a rational point of view when constructing portfolios.

If you have any questions or queries then please do not hesitate to contact us on 01323 894 202, email or use the Book a Consultation form to the right.


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