Takura Mahwehwe, Portfolio Construction Analyst at Cannon Asset Managers asks if gold is the place to be investing right now…
Gold has a very significant place in the history of both the world and finance, so its return to the front pages was always more a matter of "when" rather than "if". Gold bulls have looked like very clever people for the last decade, during which the price has risen from below $300/oz to its current levels over $1600/oz. And although off its dizzying peaks over $1900/oz, gold remains high relative to historical levels. As is to be expected with such a meteoric rise, the commodity became headline news everywhere and investors are inundated with research and opinions on where it’s going next.
As we go into the second quarter of 2012, we have noticed renewed interest in the yellow metal and its likely future movements. So what is going on, why is gold at such highs and does gold make investment sense?
The drivers of the gold price are twofold — in times of uncertainty gold is seen as a safe asset and, when people fear inflation, they see gold as an asset that will retain its real value. Currently, there is plenty of well documented risk and uncertainty in the global political and economic systems. There is also concern that the effective printing of money, especially in the USA in the form of quantitative easing, will ultimately result in inflation.
So while gold has experienced some strong tailwinds driving up its price, there are some risks associated with investing in the metal. The primary concern with investing in gold is that it is a purely speculative investment. Unlike many other assets, physical gold is non-productive and does not yield an income, thus returns are simply a function of price movements. The only way to make money from owning gold is to sell it to someone who offers you a higher price than the price you paid for it. In fact, gold offers a negative yield as it costs money to own it (storage, insurance, etc.). Unlike most other commodities it has less industrial use meaning that, once it is mined, it sits above the ground waiting to be resold.
Physical gold is, surprisingly, more risky as an investment than shares in gold mines.
The volatility of the gold price since 1971 (when the gold standard was abandoned and the gold market liberalised) is 28.7 percent, compared to 18.2 percent for global equities (MSCI ACAW total return equity index). Another concern as far as risk is concerned is the shape of returns: gradual, more consistent returns are delivered by equities as opposed to gold. Most of the gold price’s gains only came in the last ten years.
Article continues on page two and three: more on gold as an investment and why platinum is fundamentally better in this regard...