Any exposure to gold may seem alien to an advised portfolio. The metal pays no income and distributes no earnings. Gold does so little, in fact, that it doesn’t even rust. Yet gold regained popular appeal as a rare, indestructible “safe haven” during the financial crisis. Today it remains the best- performing major asset class for UK portfolios so far this century. That is despite falling in price by a fifth since its peak in 2011. UK shares have delivered total real returns of 1.9 per cent per year since the end of 1999, with bonds returning 3.2 per cent a year, according to Barclays’ latest Equity Gilt study. But gold priced in Sterling has risen at an average of 7.5 per cent a year over the period.
A good part of this performance came because gold was so deeply undervalued at the turn of the millennium. A perfect storm then followed, with inflation spiking, interest rates and stock markets plunging, and a near-systemic collapse leading to historic levels of monetary stimulus from central banks. As the global financial crisis wore on, tactical allocations to gold leapt among active funds and wealth managers. At the peak, New York’s largest gold-backed exchange- traded fund was worth more than the largest US equity tracker ETF.
Interest in gold ran far beyond Wall Street and the City, spreading as the financial crisis worsened. It hit the tabloid front pages and daytime TV, and topped the table in consumer surveys picking the ‘best long-term investment’. A decade on, gold’s appeal is likely to persist for as long as people remember Northern Rock, Lehman Brothers and the Eurozone debt crisis. Any sudden downturn in the wider markets could very likely spur interest among both new and older savers.
So what might someone asking about gold need to know?
First, that there is a strategic case to consider, especially for near-retirees worried about a sharp drop in other assets. Because gold finds such little industrial demand – only 10 per cent of annual end-use, versus 55 per cent for jewellery and 35 per cent for investment – it isn’t exposed to the economic cycle in the way other commodities are. Indeed, gold prices have in the past tended to rise during prolonged stockmarket falls, as private wealth bids up capital preservation rather than seeking growth.
Since 1971, gold has risen for UK investors in seven of the nine years that the FTSE All-Share Index has lost value on a total returns basis. That includes all five years that saw equity values fall by double-digits, with gold averaging a near-40 per cent annual gain. Gold has also tended to perform well when interest rates fall against inflation.
On our analysis, a 5 per cent holding in a simple portfolio otherwise split 60:40 between UK shares and long-dated Gilts would have cut the drawdown in 2008 – the worst single year of the last 40 for UK assets – from 13.1 to 10.3 per cent. It would have boosted annualised returns in 2000 to 2004 – the worst 5-year period – from 1.0 to 1.2 per cent. As with any ‘insurance’ there can be a premium to pay, in this case a drop in compound annual growth rate from 11.5 to 11.4 per cent over the last four decades, but a rise from 7.1 per cent to 7.3 per cent over the last 20 years.
The second point is that despite this track record of diversifying risk, allocations to gold across the UK pensions industry are negligible at best, with any exposure focused instead on London-listed mining shares. Such equities perform very differently from the metal itself, bringing management, political and credit risks which gold itself lacks. Gold-mining funds were 3 of the 5 worst-performing UK funds in Q1 according to data from FE Analytics, losing between 12 to 15 per cent on mining stocks against a 2 per cent drop in the price of bullion for Sterling investors. Across longer time frames, gold miners have been more volatile than the broader stock market, with very poor dividends.
Thirdly, people need to know that the diversification benefits of gold itself will vanish if it’s bought the wrong way. Physical coins or small bars, held at home, carry the ultimate “safe haven” cache. But they will also carry the highest dealing, storage and insurance costs, with problems of liquidity and wide dealing spreads on exit. Backed by professionally-vaulted gold, stockmarket-listed ETFs cut ongoing costs to 0.4 per cent per year – deducted from NAV each day – and show a strong record of tracking the wholesale bullion price. Owning physical bullion in specialist storage is a good compromise, offering annual costs as low as 0.12 per cent while also reducing exposure to securitised assets and financial intermediaries.