One of the easiest ways to invest in gold these days is in a gold tracking ETF such as the SPDR Gold Trust, through an online trading platform. With a few clicks you could have a position in a trust that is set up to exactly track the price of gold (less the fund’s fees). With this and other similarly sized gold tracking funds, buying and selling transactions are instantaneous, real time pricing information is available and there is of course no need to take physical delivery of any gold (trust us – that is for the best!).
Given the ease with which The Virgin Investor can invest in gold, what are the main reasons an investor would take a position in gold?
Many portfolios are equity heavy
Equities make a lot of sense as investments. Their performance as investments are tied to companies that are specifically tasked with investing money to create a return each year. Furthermore, there is the added benefit that returns come from both the growth of the company share price and also the dividends the company pays out each year.
However, many portfolios are equity heavy and vulnerable to falls in global stocks (for example as a result of a global financial crisis). One way of diversifying against shocks to investor confidence in equities is to invest in gold, which tends to be a ‘safe haven’ for investors in times of uncertainty.
With a tumultuous year ahead (national elections in France and Netherlands potentially resulting in less EU friendly governments, Donald Trump’s presidency, and a fragile looking global financial services sector), gold could offer protection against investor uncertainty.
Protection from looming inflation
In the US, Donald Trump is expected to implement tax cutting measures putting money back into the pockets of Americans. At the same time, it is expected that US government social security and healthcare spending is set to rise over the next decade. Both these factors increase spending within the economy, and will create inflationary pressures.
Inflation increases the cost of goods and services in the economy and means that a greater return from investments is needed to maintain buying power. If the price of goods and services increase by 6% in a year, any investments would need to better that to give a return that can be felt in the real world.
Gold as an inflationary hedge can be seen over time as it has preserved its purchasing power much more effectively than currency such as the US$. Just after WW2, 1oz of gold was worth USD$35. Now 1oz of gold is worth just over USD$1100 and the purchasing power of USD$35 is now much less than it was just after WW2.
Supply, demand, cultural demand from India and China
China and India collectively account for 60% of global gold demand, however 2016 saw a slowing down in this demand due to low Chinese consumer confidence, and restrictions and taxes on gold imports in China and India respectively.
With the price of gold relatively low in comparison to most of 2016, and with consumer demand for gold in China and India expected to pick up again in 2017, the price of gold could be expected to increase.
Further, in the longer term, gold offers a chance to buy into increasing prosperity and growing middle classes in these countries, as increasing numbers of people are able to buy gold.