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Smart Investor: not even the euro crisis makes me like gold

Gold has lagged the FTSE 100 by 10% in the past nine months, further confirming my prejudice against the yellow metal.

 
Smart Investor: not even the euro crisis makes me like gold

I always enjoy reading the comments made by Citywire readers and an article which I wrote in August of last year attracted a fairly large number of comments – many of which were critical of my rather one-sided view on gold. Indeed, I think I could count those in favour of my pessimistic views on either one of my hands and still have fingers left over!

The thrust of the article was that I do not invest in gold because I find it impossible to value (and hence am unable to determine a fair price for it), it lacks utility at current price levels, has no income and was far too popular as an investment for my liking. Indeed, the only reasons I could think of as to why an investor would buy gold were as a hedge against inflation (which has now fallen to around 3.5% but was higher in August) or in its use as a bartering tool should the financial system collapse.

So, after my admittedly one-sided article and subsequently positive comments by most readers on gold, how has it performed?

Before commenting on its performance, I wish to state that it has been only nine months since the article was written, which is a very short time period, but I thought it would be worth updating you in any case. Also, I am not one to gloat – this update would genuinely have been done whatever had happened to the gold price, since many commentators are currently recommending the purchase of gold in case the eurozone issues escalate further.

When the article was written, gold was priced at around $1,750 per ounce. Since then, it has been reasonably volatile and is now trading at around $1,575 per ounce. This is a fall of $175 per ounce or minus 10%. Over the same time period, the FTSE 100 has fallen from around 5,300 points to its current level of 5,290 points. This is a fall of 10 points or 0.2%. However, the FTSE 100’s annual yield was around 3.5% in August 2011, so being nine months later you could reasonably add three quarters of this to the return to give a total return of plus 2.4%. Since gold has no income, its total return is minus 10%.

The above figures show that the FTSE 100 has substantially outperformed gold over the last nine months in spite of inflation still being above the Bank of England’s target and the world economy (particularly the eurozone) looking less than stable. Indeed, the picture looks only a little rosier, with the US economy picking up somewhat, but it is not significantly better – not so much as to explain the vast difference in returns between the FTSE 100 and gold.

As to why this has happened, I could pontificate all day and not come up with the right answer. However, the rationale for investing in gold reminds me of how I used to invest in my younger days where I would seek out the exciting, growing and popular companies in which to invest. I was interested in sales growth, potential demand for the product and various other vain attributes. I cared little for what I deemed to be dull aspects of a company, namely its return on equity, financial gearing, economic moat and value.

Mistakes were made until I decided to listen to my head and not my heart. I began buying what I felt were quality companies at reasonable prices, relying solely on facts and emotionless judgements rather than predictions and ideas.

So, I understand why investors were drawn to gold in August 2011, when I wrote my article. It was exciting and in vogue. A good while ago, I would have joined you but as a now devout value investor, I am afraid I avoid gold like the plague.

For those of you who do hold it, I genuinely hope it picks up and for those of you who do not, there are still companies which merit investment in the FTSE 350 which I will continue to focus on in future articles.

30 comments so far. Why not have your say?

gordon gray

May 21, 2012 at 05:51

As a medium of exchange and a store of value gold does its job far better than any pieces of paper with dead presidents printed on them. An ounce of gold would purchase a decent toga and its accessories in Roman times, now an ounce of gold will still buy a decent suit and accessories.

Compare that to the US $ which has lost 70% of its value since 1973. I don,t think you are a very smart or intelligent investor!! your comments border on stupidity.

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John Roycroft

May 21, 2012 at 06:07

An intelliegent articel SI - The reasons you state for not buying gold are valid.

However, I don't think gold lagging the FTSE will continue as the Eurozone crisis intensifies and peoples' faith in fiat currencies falls further. Have you noticed in the last 2 trading days how stock markets have fallen but gold has gone up? I would suggest that this decoupling is likely to continue.

The opening of the Pan Asian Gold Exchange will make gold much more accessible to the masses in China and India. Retail demand from these countries accounts for 80% of global demand. Due to gold's cultural significance I believe the gold price will hold up in the long run as these countries become more prosperous.

Gold's bull run may be running out of steam but some gold in a portfolio is important as a form of insurance. We live in very uncertain times!

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dan cahill

May 21, 2012 at 06:22

I would say that holding "paper" assets of any kind is foolish at the present time. The only way out of the troubled times is to steal a bit from everybody by printing more and more paper. Stangely, this seems to work for a while, especially as various governments try to conceal rising prices. However, it cannot last and I would much prefer to hold gold as a protection from the "legal counterfeiters" who will not give up until the bitter end.

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angelo

May 21, 2012 at 06:31

Everyone should invest in gold, it is an asset. You have nothing if you only have "paper" money . You must have assets like gold, property or diamonds for example

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sgjhaghsdg

May 21, 2012 at 07:17

Over the long-term, I'd much rather hold gold than non-index linked cash. However, as most of my cash holdings are index linked, most of the rest is in equities and only a small amount in gold. Equities aren't "paper assets" but a share in a company that's generating profits and distributing these to the share holders. In many cases, this dividend stream has risen faster than RPI and the value of the company has therefore also risen.

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william Westlake

May 21, 2012 at 07:23

I would have thought that equities are an equally good hedge against inflation, provided one invests in the right company, or has a reasonable spread between companies.

If Gold has risen from $450 an Oz to $1600 over a decade, who's to say it wont fall back there again in another decade? Which doesn't look like much of a hedge against inflation to me.

Contrary to Gordon Gray I find SI's arguments quite compelling, but then I have agreed with them long before they were ever rehearsed here. Apart from a filling and my wedding ring I don't own any Gold and, even if I had the funds, wouldn't be rushing out to buy any anytime soon.

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Chris Clark

May 21, 2012 at 07:45

Seems to me that if a crash is about vaporising liquidity, then gold falls, which we seem to have had lately, and in 2008 at the end of Lehman it hit a low of $681/oz. Everyone seems to rush to US Treasuries for safety. But if the market moves to QE, or even conferences to sort out Greece, there seems to be a gold uplift. Today it is not $1575, but $1596 after a rapid rise, relief rally or sign of inflation risking stimulus?

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Matthew Hill

May 21, 2012 at 08:55

Give it another month....

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Bill lawson

May 21, 2012 at 09:04

You can't eat gold , I would rather have a barn full of wheat than gold blocks to the equivellent value, it does have its uses but to be weighed down with it when its value drops (which it will) could cause you to drown . I have read somewhere about not worshipping golden idols.

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sashamel

May 21, 2012 at 09:10

Personally I support the rainy day/insurance argument If everything falls out of bed, one needs something that is a store of value. I think a holding of about 5 to 10% of moveable assets is a judicious level to maintain.

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Matthew Hill

May 21, 2012 at 09:31

The good news is that most people who bought gold didn't do so 9 months ago. Can we have a 9 year comparison?

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Keith Cobby

May 21, 2012 at 10:09

Gold produces no income and it is therefore purely speculative, so it falls at the first hurdle for me as an investment.

The only real use for it would be if we had to return to bartering. But, I agree with Bill in that you can't eat it.

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Drake

May 21, 2012 at 10:27

Never forget that you can't predict the future.

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Stephen Griffiths

May 21, 2012 at 11:42

BIll Lawson....I read something about not building yourself bigger barns....same place as what you read I think.

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Jeremy Bosk

May 21, 2012 at 12:16

Gold has all the drawbacks listed so I would prefer dividend paying gold miners; which in the medium to long term do go up and down with the gold price but compensate with income. If you must buy the metal then buy antique gold coins which have some rarity value. Since the best coins require quite large amounts of cash, buy the coin dealers or the pawn brokers. If you start to think about companies that service collectors then add the stamp, medal and autograph dealers. Stanley Gibbons, Noble Investments, Avarae Global Coins, H&T, Albermarle and Bond and so forth.

Lateral thinking is required.

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an elder one

May 21, 2012 at 13:27

Gold is real stuff and has a pedigree (of barter) and a measure of wealth) stretching back thousands of years; paper money is just that, paper with a promise scribbled thereon by a ruling class person - can such be trusted entirely.

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Jeremy Bosk

May 21, 2012 at 14:17

Yes paper money can become worthless. But gold can be debased. Can you, personally, tell gold from gold plated lead or tungsten? When you buy from a reputable dealer there is some sort of traceability and purity guaranteed. In a post apocalyptic world will anyone have the technical ability to measure the purity of an ingot? Will you be able to buy a basket of groceries with a gold bar and get change? In Tesco vouchers? A hand written IOU? Or will shopkeepers keep scales and metal shears to snip bits off an ingot?

In earlier times, gold was rarely used for trade but simply piled in vaults alongside jewels as a symbol of conspicuous wealth like a Fabergé egg. Trade was done either with copper and silver coins or with IOUs and ledger entries.

In preparation for an economic melt down, build a dry cellar and stockpile tinned food. I remember in the early sixties my dad discovered a wartime tin of bacon which tasted quite good even after almost twenty years.

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an elder one

May 21, 2012 at 15:29

Archimedes, a Greek, solved that problem ages ago; one assumes that even in dire straights there will be some sort of currency into which to convert gold into, on say, a weekly/monthly shopping basis. Not much of a diet, wall to wall bacon! I'd sooner collect nuts and berries, better still buy some fertile land and grow your own.

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dan cahill

May 21, 2012 at 16:58

Growing your own! Good idea but will you ever get to eat the produce? Others will be hungry and will take any food that you have.

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Karl Smith

May 21, 2012 at 18:12

Frankly, in the low interest environment we find ourselves in, I don't see any difference between holding physical gold and holding cash. In a Euro meltdown, i'd rather trade gold than trade Euros (or sterling for that matter).

But SI is correct in the ascertion that gold is not an investment. Perhaps it's part of a trading strategy. As an inflation hedge, gold has some legs, but more importantly than that, it enables a standard unit for moving between fiat currencies. So perhaps view it as a currency hedge.

In the event of toatal financial system failure, we'll all have other much more important things to worry about! In that instance, the dry cellar is just another way to die slowly.

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an elder one

May 21, 2012 at 18:32

and buy a shot gun and plenty of shells!

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Steve Kimber

May 21, 2012 at 18:39

I agree with all of you totally,

just a thought though.

Gold may already be discounted as the central European banks bought gold and it may be all they have to trade with if their governments nationalise them.

I hate gold but I'm hanging with it at the moment, it may be up or down but it will always be there for tender. Yes physical gold

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Jeremy Bosk

May 21, 2012 at 18:49

So as well as the metal clippers and scales, shopkeepers will have to perform some very skilled scientific calculations. For an idea of the practical difficulties, see this link:

http://www.math.nyu.edu/~crorres/Archimedes/Crown/CrownIntro.html

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Stephen Griffiths

May 21, 2012 at 20:59

Let's look at this another way. We generally think of this country as being immeasurably better off than it was during feudal times. Let's just say you were to go out with a metal detector and search your garden. Right now would you rather stumble on the private horde of an English anglo-saxon chief...lets say a kilo of gold...or the personal next egg of someone from the sixties who managed to put aside £5000 in cash in a box and bury it in the garden. Five grand could buy you a house back then. Fiat money is a means for the state to steal from its citizens.

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an elder one

May 21, 2012 at 23:34

Putting cash into something material such as gold, real estate, artifacts, etc, is nonetheless an investment whatever ones measures of judgement of expectations, speculative notion, whatever. However, nothing is ever certain except ones terminus.

Investment is just dressing up capital (cash at current valuation) in something regarded as substantial (longer lasting or fruitful)

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Matthew Hill

Jun 05, 2012 at 10:22

Not so smart investor - you forgot to allow for currency returns (you don't hedge the currency on gold - that would rather defeat the point). This has provided strong sterling returns recently.

I hope people didn't sell gold and buy the FTSE following your article above.

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Godfrey Bloom MEP

Jun 05, 2012 at 10:57

What an interesting view. A specialist in 9 month portfolios. In 2001 I switched 75% of my portfolios to gold (from equities), 6 months ago I switched the balance from equities to cash, 50% Sterling, 50% USD.

I can only assume this piece was written by a very young man.

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Patrick Napier

Jun 05, 2012 at 11:00

Or woman!!

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Jeremy Bosk

Jun 05, 2012 at 14:04

With a banknote you can help kindle a fire, gold will serve as a paperweight. Neither has much practical utility which equates to fundamental value. So both are effectively ornaments worth whatever other people are willing to swap them for, be it baked beans or motor cars. It is all down to the behavioural psychology of the consumer, investor or speculator who desires it. I am not comfortable trying to predict other people's emotions, so stay away. Judging when to buy and sell is too close to the "greater fool" theory rife during the dot com mania. I also avoid fashion, fast moving consumer goods and other concept stocks for the same reason.

Industrials produce a physical product which can be exchanged by the company for whatever medium of exchange - gold, banknotes, barter, cowrie shells - is current. So do providers of vital services such as pharmaceutical and property companies. Telephone and broadband are arguably essential to modern life: but Facebook?

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Steve Kimber

Jun 05, 2012 at 18:06

Facebook's fine if your currency is "virtual" money.

Who's to say which one's more real?

Feel free to answer using both or no sides.

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