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Looking beyond the headlines: gold

James Robertson highlights why timing the market sounds simple, but is not easy to achieve – in fact it’s impossible to achieve if you take a modern approach to investment portfolios.

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Published 4 August
2 mins
The price of gold has been hitting the headlines recently, with the latest uptick in COVID-19 cases pushing gold higher to reach a record US$1,988 an ounce on 3 August, before dropping back slightly after it failed to push through the US$2,000 barrier.

The latest increase is a surprise to many investors who thought that the 2020 gold rush ended in June, when around £262 million was pulled from gold funds after it reached US$1,783 an ounce. That, in itself, would have been a sizeable profit if you had invested following the commodity’s initial fall at the beginning of the crisis, which saw it drop 4.5% in the week ending Friday 13 March, its biggest decline since 1983. At that time, rather than any issues with the asset itself, it simply became a casualty when liquidity became the number one priority for investors. Many sold gold to cover outstanding margin calls on other investments, i.e. the collateral they had placed with a counterparty to cover some or all of the credit risk being taken by the investor.


However, what most of the reports beyond the headlines fail to show is that gold isn’t actually increasing in value – instead the value of the US Dollar is weaker – as are all major currencies. The value of gold is merely a side show.


Gold is not an investment that we favour as it doesn’t generate any cashflow or income – there are no coupons or dividends to reward investors. If you buried a gold bar and dug it up a year later, it would still be a gold bar. It’s only worth money when people think it’s worth something. Yes, it has a few industrial uses, but most gold is ‘just’ seen as a store of value.

This also means it is not easy to value using any of the tried and tested valuation methodologies. This, in turn, means that there are multiple opinions as to when it represents fair value, e.g. if US$1,900 per ounce is good value, is US$1,800 still good enough?


Not being able to objectively determine the true worth of an asset means it is difficult to know when to buy or sell. And as gold tends to trade in opposite directions to the fickle investor confidence, predictions are all the harder. Do people really believe that all hell may be about to break loose and currencies fall over? If that were the case, would we really revert to trading in gold?


We don’t believe that’s going to be the case – particularly with statements such as that of the Federal Reserve on Thursday 30 July flagging that the central bank remains “committed to using its full range of tools to support the US economy in this challenging time”. It’s a statement echoing in the halls of other central banks too. Meanwhile, a quick and successful roll-out of COVID-19 vaccines, and/or an uptick in the value of the US Dollar, would result in investors selling to lock-in any profits. Gold would not glitter as much.

Over short time periods, such as days and weeks, some investments perform well (or not) and it is extremely difficult to know by how much they will move in terms of value – moves that are often significant given the speed and nature of any news flow. So instead, we prefer to focus on a broadly diversified range of investments for which there are solid options to assess whether the investment represents good value, or whether it is being priced beyond a natural tipping point.


Meanwhile, spreading your investments across multiple types of assets, companies, currencies, geographies and sectors should also reduce the likelihood of one news event affecting too much of your portfolio.


Even in the mid-19th century, an American author and philosopher, Ralph Emerson, stated: “The desire of gold is not for gold. It is for the means of freedom and benefit”. We, on the other hand, would rather seek to ensure you achieve your financial goals and aspirations through logical choices in a broad swathe of investments that can grow and produce income by themselves.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how goals-based investing can help, or call +44 (0)1624 645000 to speak to our client services team.

 

If you would like to find out more about how we can help clients manage their investments, please contact us on the same number as above, or complete a form using the links towards the end of the page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’
portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

about the author

James Robertson

James Robertson

Based in our Isle of Man office, James is responsible for delivering the end-to-end investment management process, overseeing the implementation of the Nedbank Private Wealth house view within our discretionary managed portfolios, and for developing our investment proposition.

 

He has over 18 years’ investment experience and has been responsible for the Nedbank Private Wealth managed discretionary portfolios since 2007. James holds the Certificate in Investment Performance Measurement from the CFA Institute.

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