Is gold the best bet for building personal wealth?

While all that glitters may not be gold, the general consensus tends to be that gold is a safe bet when it comes to investing – at least for those not in the know. Investment experts, however, don’t rate it as a particularly strong choice to make.

This special report looks at how with deposit rates at zero or worse, and Government bonds also in negative territory, in many cases it’s not a good time to be a safety-first investor. 

[ The Irish Times ePaper ]

“Gold has a reputation as a ‘safe haven’ asset that investors often flock to in times of panic, but it is far from risk-free,” says Daniel Casali, chief investment strategist, Smith & Williamson.

“Historically the price of gold has been as volatile as broad equities, enduring many losing streaks, and therefore should not be thought of as risk-free.”

Casali explains how Nobel Prize-winning economist JM Keynes famously dismissed gold as “a barbarous relic” as its perception as a precious asset is largely down to cultural reasons rather than having practical uses, such as making jewellery.

“Unlike paper money, the supply of which can be expanded by central banks turning on their printing presses, as a physical asset that needs to be extracted from the earth, gold is widely seen as a ‘store of value’.”

Donough Kilmurray, chief investment officer at Davy, agrees.

“You have to consider what gold does. It doesn’t create, it doesn’t yield anything, it doesn’t produce anything. You could put it in a spreadsheet and look at the correlation and volatility of it but it’s not like a fundamental asset that you can put a value on. It’s very psychological how people interact with it, how they buy it and sell it.”

Kilmurray says that gold really only comes into its own in times of massive financial collapse, such as the Great Recession in the 1930s. While the value of gold does go up and down over time it can take decades to increase in value if it does dip. “To think of it in asset terms, the price of gold is the same now as it was 10 years ago,” he says.

“To our mind gold is only a hedge if the markets sink and the financial system or the major currencies are in big trouble.We’re not saying it can’t happen, but the chances of it happening are very small.”

Worth the risk?

Despite the somewhat low opinion of gold by investors, they are not completely against investing in it. Casali says that compared with cash that earns little interest in a bank, the opportunity cost of holding gold – which generates no income, unlike paying shares or yield-generating bonds - has fallen, and offers the potential of higher real returns in a high-inflation environment.

Exchange rate

“Much is dependent on the US dollar exchange rate, which the gold price is predominantly denominated in. Arguably a best-case scenario for gold to outperform cash would be if the US dollar were to fall in value against major currencies and inflation were to continue to accelerate,” he says.

Safety in investment terms depends on what the investor is seeking.

“In terms of safe havens - safety depends on what you’re worried about,” says Kilmurray. “Perversely, if you’re worried about long-term inflation, the riskiest asset is cash in bonds. If you are worried about volatility in the near term – that you might need some money next year or the next couple of years – then the riskiest asset is one with volatility, so you don’t want to go near stocks.

“It all depends on your timeline and what you’re worried about. You need to consider your needs in the next few years and in the long run.”