Gold is a risk asset favoured by the newly rich, it carries no yield, it costs a lot to store and its value has moved annually by 20-30% – in both directions!  In our current economic environment it is only the first fact that makes it desirable as an investment.

Gold was our worst performing asset in 2013, thankfully I never got over-enthusiastic with gold as a major investment option, so our losses were low when compared with our gains in shares.  But we can’t only hold shares without experiencing a fair number of sleepless nights. I acknowledge we need to diversify our assets to add safety to our portfolios, but I’m struggling to find good value currently. As mentioned in a previous blog the only queue for government gilts and bonds is towards the door. It’s hard to see a reasonable return coming from commercial property yet.  We can’t just hold shares and then cry foul when markets swiftly fall.  So I think it’s time to top up our gold holdings following a meeting I attended in December where the head of The World Gold Council was speaking.

When was the last time you saw an advert that says “We buy your gold”.  Precisely, we can’t remember.  Adverts were everywhere – TV, radio, newspapers even at the side of the road.  In hindsight it’s not hard to see how the supply demand equation got so out of kilter.  Hedge funds wanted out to buy cheap shares which dumped more of the shiny stuff on the market.  The price fell from $1900 to $1200.  We bought at $1550 which I thought was a bargain.  Everybody bought more shares and the markets shot up.  The fear of a global meltdown began to subside and the smart money bought more shares.  Not all shares, emerging markets also lost money over the year, but traditional share markets did well.  But now traditional shares aren’t cheap anymore and gold mines can’t produce the stuff at $1200 and are being moth-balled.  This all points to a turn-around in the supply demand equation, the return of gold price stability, and dare I say, the opportunity for future growth.

It’s a rosy outlook, and not one without its detractors.  But holding some more gold is starting to feel right once again.  My thanks go to fellow investment manager Tim Price, who made these observations.  He reproduced these three obituaries of gold from the pages of the New York Times:

  • “There is simply nothing in the economic picture today to cause a rush into gold. The technical damage caused by the decline is enormous and it cannot be erased quickly. Avoid gold and gold stocks”;
  • “Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels”; and
  • “The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators’ dreams into a nightmare.”

Believe it or not… these quotes are from 1976, when the gold price fell from $200 to $100 an ounce. Thereafter, gold rose from $100 to $850.

Tim continues:“Why keep the faith with gold? One statistic. Last year, the US Fed enjoyed its 100th anniversary, having been founded in a blaze of secrecy in 1913. By 2007, the Fed’s balance sheet had grown to $800bn. Under its QE programme (which may or may not get tapered according to the Fed’s current intentions), the Fed is printing $1 trillion a year. To put it another way, the Fed is printing roughly 100 years’ worth of money every 12 months. (Now that’s inflation.) Conjuring up a similar amount of gold from thin air is not so easy.”

Gold is our insurance policy should good currencies go bad and for when inflation eventually picks up.