Preserving the value of capital is the first principle of effectively managing wealth and the world’s desire to do so has made the price of gold surge. But does this mean it’s now too late to pile in?
Gold is a time-honoured safe haven. Being finite in quantity and having many uses beyond the decorative, it tends to hold its value well and then rocket in times of crisis. But for this very reason, it may have lost its shine as a portfolio protector. It may even be damaging rather than defensive.
On the face of it, gold may seem like a good bet currently. Amid wildly volatile markets it has rocketed to its highest price in seven years, diverging dramatically from global stock markets and rising as much (and in fact more) than they have fallen (roughly +20% against -15%). Thus, gold may have already lost some of its shine as a defensive play for those considering buying in at record high prices. Analysts are warning of possible falls in the short term, as well as the precious metal ending the year down from its price today.
The outlook is, of course, complex. Potentially violent inflation is on the horizon as we can expect already rock-bottom interest rates to be held if not cut further as governments grapple with the economic fallout from the COVID-19 crisis. Inflation typically boosts the price of gold: central banks may be able to print more and more money for quantitative easing, but the Earth can only yield so much gold.
Quality is key
As well as betting on longer-term price rises due to inflation, investors could also look to play the gold theme through mining stocks. Coupled with rising prices for the metal itself, extraction costs are falling due to an oversupply of energy in a suddenly unproductive world. However, as with other stocks, extreme care will be required to pick the long-term winners. Underlying quality is particularly important now.
As well as betting on longer-term price rises due to inflation, investors could also look to play the gold theme through mining stocks. Coupled with rising prices for the metal itself, extraction costs are falling due to an oversupply of energy in a suddenly unproductive world
So too is the type of investor you are. It’s important to remember that the gold price actually fell some 25% during the dark days of 2008’s Global Financial Crisis and, although it recovered, investors experienced a wild ride. Here again, although inflation means gold might be a good bet over the medium to long term, investors should never forget it is still a bet nonetheless. Some experts are warning it should be seen more as a speculative rather than defensive play.
It’s important to remember that the gold price actually fell some 25% during the dark days of 2008’s Global Financial Crisis and, although it recovered, investors experienced a wild ride
Diversify, diversify, diversify
Views vary, but one constant is that gold – or indeed any type of asset – should only form part of a properly diversified portfolio (and likely a small one where alternatives are concerned). Sound asset allocation is the key to both maximising reward and minimising risk. What’s more, if implemented in the nuanced manner the professionals can, it also means you can seek a degree of both safety and growth for your investments.
Where you fall between those poles is complex. Your financial personality traits and how comfortable you are with volatility and risk exposure are key. More important still is your ability to recover from losses, which is function of your overall net worth, liquidity and investment time-horizon. Dependent on those factors, there are several other options could you explore instead of simply answering the centuries-old call of gold.
Currencies are notoriously tricky and are certainly not to be dabbled in without professional guidance, but it is worth noting that the recent collapse in oil futures – due to an excess of supply and a dearth of storage – has sent the world scurrying to safe havens such as the Japanese yen and US dollar
Currencies are notoriously tricky and are certainly not to be dabbled in without professional guidance, but it is worth noting that the recent collapse in oil futures – due to an excess of supply and a dearth of storage – has sent the world scurrying to safe havens such as the Japanese yen and US dollar. The greenback is also likely to benefit if share prices fall again in the months to come. American government debt in the form of US Treasury Inflation-Protected Securities is also liked by some, on the basis that these are currently under-pricing inflation expectations and would be due a big boost once markets stabilise.
Bonds remain an essential buffer to potential equity losses, and if selected wisely corporate debt instruments could offer robust growth as well as plugging the dividends gap many income investors are suffering from. Here, the hunt is on for high-quality, short-duration fixed income from companies that, the coronavirus crisis notwithstanding, are otherwise in good health.
We all like to invest in things we understand and tangible investments like gold and property will always have strong appeal. Advocates of gold are also very vocal. Don’t let tradition and media exposure unduly skew your strategy, however. Alternatives, commodities included, should generally only make up a small proportion of your portfolio, so be sure to consult a professional on matters of asset allocation. This drives the majority of both returns and risks.
Property is another option, but again with underlying strength and diversification being key. Commercial real estate, particularly in the form of property investment trusts focused on essential premises like grocery stores and healthcare facilities, is a logical play. Bricks and mortar, like gold, has a lot of emotional and pragmatic “pull”.
There is, of course, lots of scope for investors to think outside the box. We will emerge from the crisis to a much-changed world. Cryptocurrencies are an increasingly mainstream (although still very much alternative) asset class and their status as a stable store of value will no doubt be bolstered by any monetary loosening measures from central banks in the months and years to come. The unregulated nature of cryptocurrency investing should give investors serious pause, however.
Commercial real estate, particularly in the form of property investment trusts focused on essential premises like grocery stores and healthcare facilities, is a logical play
A likely less risky, and more easily understood, way to preserve and build wealth could be through hedge funds – vehicles which pool money from High Net Worth Individuals and/or institutions to follow highly specialised investment strategies. These often do extremely well from market dislocation, particularly those snapping up distressed assets. While hedge funds have historically been the preserve of the super-rich, some wealth managers do offer access at more modest levels of investment, including those on our panel. Their ability to invest nimbly and often in contrarian ways could be a vital risk management tool, and deliver outsize returns to balance out other losses.
Look before you leap
The bottom line is that ages-old safe havens have to be looked at with fresh eyes in this rapidly changing landscape, and so too should any newer, putative ones. And the lens should always be the context of your broader financial affairs and existing investments. Allocating a disproportionate amount of your wealth to gold is unlikely to be wise, particularly at the current price point. All manner of alternative investments could have a place in your portfolio, gold certainly included, but any significant decisions have to be made on a holistic, highly risk-aware basis.
The bottom line is that ages-old safe havens have to be looked at with fresh eyes in this rapidly changing landscape, and so too should any newer, putative ones
If you need to find safe stores of value for your wealth, please don’t go it alone. Never has the need for professional advice been greater: look before you leap and get the guidance the seriousness of the situation merits.