Tuesday, 21 September 2021

The Case for Gold

In recent months I have become increasingly bearish on global equities. The main concerns are the increased debt arising from Covid over the past 18 months and secondly our lack of progress on the existential threats posed by climate change. I think these two elements could seriously impact the markets over the coming months and years so I have decided to de-risk my portfolio and move into government bonds and gold.

Why Gold?

In the past, I have never been a big fan of holding gold. Obviously it cannot provide an income so that was one reason back when I needed dividend income to bridge the gap after taking early retirement in 2008. But that doesn't mean there is no return...in fact I was surprised to learn that over the past 15 years or so, gold bullion has generated a capital appreciation of 11% p.a. on average.

At the time of moving to retirement we had the financial crisis and the slump in interest rates on cash deposits. In 2007, it was common to get 5% or 6% annual interest on cash deposits but over the past 12 years, returns have been dire and provided an average return of just 6% over the whole period. Over the same time frame inflation as measure by RPI has risen by 39%...therefore a real negative return of -24% for savers. Cash deposits are likely to remain at low levels for the foreseeable future.

The Gold Standard

Back in the day we had a thing called the gold standard which provided stability for the major currencies such as the US $ and the British pound. The Bretton Woods agreement of 1944 established a system through which a fixed currency exchange rate could be guaranteed using gold as a universal standard.

Of course, under this system it was not possible to create more money during a crisis and after the Vietnam War and the oil crisis of the early 1970s, President Nixon 'suspended' the conversion of the dollar into gold - effectively creating fiat currency and the ability for governments to print money to protect the financial system...in other words, a magic money tree!

Currencies are therefore becoming lass stable and only continue so long as there continues a collective belief in the monetary system. Gold can therefore be regarded as insurance against a fall in the purchasing power of modern currencies. Maybe crypto currencies such as Bitcoin can be regarded in a similar vein as we transform towards a digital world.

The Vehicle

It's always possible to buy gold coins and store them at home but for most this is not very practical. The easiest method is to hold physical gold via an exchange traded fund in your pension or ISA.

SGLN price past 3 years

I decided to go with the largest fund which is iShares Physical Gold (SGLN) which has been around since April 2011 and with low annual charges of 0.15%. The fund has assets of $12.8 trillion.

Other options could be a fund such as Blackrock Gold & General or LF Ruffer Gold for example but as my platform charges are capped for shares and ETFs with AJ Bell, the iShares option is the better one for me.

Conclusion

Apart from the Covid dip last year, the bull run in equities has continued for quite some time. The US markets are close to their all time high point...maybe there's more to come - who knows? But for me, it seems prudent to bank some of the gains made over this period and squirrel them away into the 'safe' for the time being.

S&P 500 Index past 5 years

We have the COP 26 conference coming to Glasgow in November and an opportunity for world 'leaders' to actually do what they all know needs to be done. However, given their collective track record so far, I am not overly confident in the ability of governments to get to grips with the climate crisis. I think the worsening climate situation could well become the biggest threat to the stability of global markets. We have the 'Code Red' warning last month from the IPCC and now the latest report from the UN says that emissions will be 16% higher by 2030 whereas they need to have fallen by at least 45% by this date to be on track for net zero by 2050. Actions or lack thereof over the coming year or two should give us a better indication on whether our politicians and world leaders are up to the job.

Sept 2021 (click to enlarge)

For now I will continue to hedge my bets with gold, precious metals and government bonds. The shares were purchased at an average price of £24.50 and held in both SIPP and ISA and with my precious metals ETF now make up 8% of my portfolio.

As ever, this article is merely a record of my personal investment decisions and take on the risk/rewards associated with the current markets. It should not be regarded as an endorsement or recommendation - always DYOR!

2 comments:

  1. Hi John, interesting. From an asset allocation I can understand wanting to add gold to a portfolio as it's correlation with stocks is either weak or negative. But as you say, it doesn't provide an income so that rules it out for a lot of income-focused investors like me.

    In terms of climate change, there is an enormous amount of good work going on to reduce carbon emissions, but so far it doesn't look like nearly enough to offset continued economic growth. My favourite source of info on our progress (at least in the UK) is the UK's Climate Change Committee:

    https://www.theccc.org.uk/publication/2021-progress-report-to-parliament/

    It will be interesting to see if any UK government takes its legally binding obligations seriously...

    John

    ReplyDelete
    Replies
    1. Hi John,

      Good to hear from you and hope you are keeping well...it's been a while!

      Yes, obviously for those who need income its a non-starter and that's one of the reasons I have avoided gold in the past. But with the building uncertainty and concerns combined with my move from income generation to capital preservation, it has come into play as a diversifier.

      The CCC are certainly a good source if information on UK climate...Chris Stark is a good bloke to have at the helm and I follow their blog. As you say, a lot of good work going on at present in the run up to one of the most important conferences we will host.

      I must admit that I am not very optimistic given the lack of progress on global emissions since Paris in 2015. The Code Red IPCC report should be a wake-up call but the politicians don't seem to be able to understand the scale of the impacts or take the warnings from the climate science seriously.

      The gathering in November could be the final roll of the dice...or maybe COP 27!

      Delete