Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Podium gold?
Gold is trending up, in price and discussion on its role in a portfolio. While European investors have typically included an allocation to gold as a matter of course, it is less common elsewhere.
The European bias harks back to the debasement of currencies in early 1900, the safe-haven status during the war and the preponderance of private banks in Switzerland, the notional home of gold.
When a range of wealth advisors across the globe are asked about their allocations to gold, unsurprisingly there is a wide range, from zero up to 15 per cent. Gold price sceptics enjoy the take of the father of infamous financial phrases, Warren Buffett:
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
“It’s a lot better to have a goose (i.e. stocks) that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”
The less colourful would state that gold has little value for long-term investors, where decisions on growth assets should predominate.
Today there are a host of potentially fundamental reasons to hold gold.
The first is the lack of yield in bonds, undermining the consistent criticism that gold has no yield. The opportunity cost of holding gold is now on a par with a government bond, assuming income is a key component in bond allocations.
Then there is some wavering on the likely direction of the USD. A lower dollar exchange rate is gold-friendly; this relationship has lasted over 40 years, back to the correlation with the USD/Deutschmark rate.
Yet the USD is proving sticky against weak interest rate differentials and high Treasury issuance, as few are willing to pile into an increasingly fragile Euro.
Inflation is the reason many investors think of gold. Monetarists would state that the current eye-popping increase in government debt will result in inflation down the track. The counter-argument is that quantitative easing of the last decade has been unable to stoke the inflationary fire.
The causes behind low inflation have been well covered and include technological change, demographics and globalisation. Recently the higher weight to services and housing was putting some pressure on the CPI; that is now less likely.
The source of inflation is unlikely to come from the standard demand/supply balance, or so-called output gap, which measures the spare capacity in an industry and the labour market. Instead, it could emerge from ‘Big Government,’ the expanded role governments may play in regulating anything from supply chains to indirect taxes to possibly contemplating longer-term income support measures.
Populist movements of all persuasions and the election cycle leave an uncomfortable feeling that some of this will become a reality.
Other more extreme views are that there is an intentional undermining of the nominal value of money underway to reduce real debt in a highly leveraged global economy. It implies the collusion of central banks that, notwithstanding their current programmes, have stated their intention to maintain inflation targeting as their primary objective.
Back to the question. How much gold and how should one hold it in a portfolio? There is obviously no uniform answer and there is also a degree of investor self-belief in its merit that should sway the argument.
Less than 2 per cent seems somewhat irrelevant and would purely act as a small comfort to point to if the conditions proved supportive. Somewhere between 3 per cent-10 per cent has clout. The purpose would be as a negatively correlated asset to other holdings, as gold has been shown to be.
The holdings can be diversified in physically backed ETFs, equity gold sector ETFs or individual stocks. In a complex enough world, there is no need for tricky strategies.
Gold is not for everyone. Some may prefer to forego any allocation if there is enough defensive characteristic and flexibility in the portfolio to deal with the concerns mentioned above.
The gold price is proving highly volatile. Best ‘guesstimates’ of the price of gold range from US$1500 to US$2000 in the next 12 months. That range is indicative of the breadth of debate on this investment asset.
