Why it pays to invest in gold

Gold can be a useful insurance policy for investment portfolios, but it's not perfect

Holly Black 8 April, 2020 | 1:08AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Kenneth Lamont. He is an ETF analyst at Morningstar. Hello.

Kenneth Lamont: Hello, Holly.

Black: So, one of the areas that you look at is gold, which is typically seen as a safe haven at times of uncertainty or when the stock market is volatile. Why does it typically do well at these times?

Lamont: Well, it's widely considered to be a currency of last resort. Gold is quite unusual. It doesn't pay any dividends and that actually holds a little economic value. Of course, we know it can be used in jewelry and other purposes, but primarily, it's driven by market sentiment and for generations it's been considered to be an apocalyptic asset, an asset that you would stuff under your bed, save your money when all the walls are falling.

Black: Well, that's quite the brutal scenario. So, how has that played out this time round? How has gold done in this latest sell-off?

Lamont: Yes, it's acted as we would have hoped. For a GBP investor at the beginning of the year a gold ETC or the gold index, the gold price is up 15%, more than 15%, while the MSCI World, which is a proxy for the broad equity markets, are down more than 15%. So, that's a significant difference.

Black: So, the way that investors would access that is rather than going out and buying gold bars, which can be tricky, especially when you're not allowed to leave your house, is to own one of these exchange-traded funds that tracks the gold price. Are there a couple that you particularly like?

Lamont: Yes, there's two actually. There's the Invesco Physical Gold ETC. This just recently dropped its price to just 19 basis points, very, very cheap way of accessing the price of gold. This gold in particular, the product itself is backed by physical gold. For this product, the gold is sitting in JPMorgan's vaults in London, which is quite pleasing for British investors. There's something about knowing where your gold is physically stored, which is quite reassuring. There's another product listed on the LSE, which is the WisdomTree Physical Swiss Gold, which as it suggests, the gold is actually stored in Switzerland. So, if you have a greater trust in the safety of Swiss gold, then perhaps you would be interested in that product.

Black: And it's amazing, they're so cheap. I mean, with all of this in mind, does that mean everyone should have a bit of gold in their investment portfolios? Or are there downsides to owning it?

Lamont: Well, there's no such thing as a perfect asset. As I mentioned before, gold as an asset doesn't pay any dividends. There's no income stream from gold. So, really, you're beholden to the fluctuations in the gold price. There's no guarantee that the gold price will continue to go up forever. The real strength of gold is its low correlation with other traditional assets that you have within your portfolio. And therefore, it can be used as ballast through time to smooth your returns. The correlations with the broad equity market over 10 years have been slightly negative. But that doesn't tell the full story. If you look at moments like, as we discussed, moments of market distress, you see a strong negative correlation, which gives a real – it is really useful for, as I say, I think ballast to the portfolio.

Black: Super. Well, thank you so much for your time. For Morningstar, I'm Holly Black.

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Holly Black  Holly Black is Senior Editor, Morningstar.co.uk

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