Drew Meredith from Wattle Partners explains the benefits of gold and gold-related funds or products in a diversified portfolio.
As a change of pace, I thought I would touch on one of the more popular investments in recent times, gold bullion. I have personally recommended clients hold gold within balanced portfolios for several years, and they have been rewarded with double-digit returns over the period.
Despite its increasing popularity, the yellow metal remains misunderstood by the majority of advisers and investors alike.
There has been a stigma attached with being a “gold bug,” expecting the end of the world as we know it, yet those who have avoided it due to a lack of dividends have fared poorly as banks across the globe cut dividends.
One way to access the commodity is direct, through the Perth Mint Gold ETF (ASX: PMGOLD), and the other via an ETF, like Betashares QAU ETF (ASX: QAU) or ETF Securities (ASX: GOLD). The former offers an exposure to movements in the US$ price of gold, being currency-hedged, the latter in the form of unhedged gold in A$, which now sits at $2,700 an ounce.
Why hold gold?
We like gold as it represents a real asset that has the ability to protect your portfolio in the worst-case scenario of continued volatility and global shutdowns. More importantly, gold bullion has proven itself to be an important store of wealth during periods of both deflation and inflation; both of which are increasingly likely in the coming years.
We believe the risk of inflation either spiking or moving towards deflation is higher than a continuation of the status quo. In the case of deflation, the demand and supply issues faced by a global economy in mass shutdown will not be easy to move on from, but looking longer-term the huge fiscal and monetary stimulus, which has expanded into bond and equity-buying by Central Banks, will more than likely result in several bouts of inflation.
Gold bullion is a proven hedge and has consistently delivered returns that are the opposite to (or not correlated to) movements in global share markets. This could not have been evidenced better than the performance of gold bullion during the early-2020 volatility and sharemarket slump, during which gold delivered a positive return of about 4%.
What is the structure?
Investors will receive the return of gold bullion priced in either A$ (for GOLD) or US$ (for QAU). GOLD will benefit from both further falls in the value of the A$ and any movements in the gold price. Both are backed by physical gold bullion held in an account maintained with JPMorgan Chase Bank in JPMorgan’s London Vault premises on behalf of unitholders. All the gold bullion meets the standards required for certification as ‘London Good Delivery Bars’ as specified by the London Bullion Market Association (LBMA).
How has it performed?
Gold bullion has performed strongly over the last 12 months, being one of the best-performing asset classes in both 2018 and 2019. GOLD is up 42% for the 12 months to 22 May and QAU up closer to 29%, showing the benefit that currency can have.
Takeaway
History, in particular, the 1970s and 1980s, has shown that in times of poor economic and monetary management, gold represents the best inflation hedge, as investors flock to assets which are real and are in limited supply. Gold is uniquely positioned to benefit in today’s unprecedented environment, having delivered positive returns in both inflationary and deflationary environments.
It was during the 1970s that major central banks around the world began increasing interest rates, following a huge monetary and fiscal stimulus, in order to combat rising inflation; during this decade the best performing asset class was gold bullion, while sharemarkets provided little to no returns.
Contrary to this, gold also performed well during the Japanese deflationary era, meaning it has the potential to protect a portfolio in both these difficult scenarios. Gold provides an excellent hedge for investors due to its history as being a tradeable currency, its finite supply and many industrial or personal uses.
While the return to a gold standard is unlikely, the continued intervention of global central banks in an effort to devalue their currencies is increasing the attractiveness of gold, as is the fact that global interest rates are now nearing 0%, making the opportunity cost of holding gold substantially lower. This is evidenced by the continued stockpiling of gold bullion by many emerging countries, including China and Russia.
This report was written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
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