Why gold should always be a portfolio staple
Gold prices have surged to record highs and investors have flocked to hold it as an asset in the uncertainty of the COVID-19 pandemic. But gold is more than a temporary hedge and its characteristics can make it a valuable long-term component of a diversified portfolio.
I spoke to Chris Brycki, CEO and Founder of Stockspot, to discuss how gold has been used in Stockspot’s portfolios and why it should be considered a portfolio staple.
Gold - more than just an alternative
Gold has traditionally been viewed as an investment safe haven due to its defensive and growth qualities. It has historically performed differently to other asset classes and offered positive performance in a range of market conditions. The performance of gold over the year-to-date, covering the COVID-19 pandemic and associated periods of volatility is shown below.
Gold prices January-August 2020
Source: Bloomberg, ETF Securities
Increasingly, investors are becoming aware of the value of including gold in their portfolios. While some are only beginning to invest in gold now, Stockspot’s portfolios have included an allocation for many years.
“We've constructed our portfolios based on Markowitz portfolio theory, which basically says that you actually want to include different assets in a portfolio that move in different directions i.e, they don't all move in tandem. They often move in the opposite direction… Unlike a lot of other assets that are sometimes seen as being defensive like property or infrastructure, gold actually has a much better standing at actually providing negative correlation to equities at the time when you need it most.”
The correlations between gold and other major asset classes is shown below.
Source: Bloomberg data as at 31 July 2020. Correlations are calculated monthly over 20 years in Australian dollars. Australian equity is represented by the S&P/ASX200 Total Return Index. Global equity is represented by the MSCI World Total Return Index. Australian fixed income is represented by the Bloomberg AusBond Composite 0+ Yr Index. Global fixed income is represented by the Bloomberg Global Aggregate Total Return Index.
Mr Brycki found gold’s negative correlation to equities has assisted in offering protection to his clients’ portfolios during this year’s market uncertainty.
“When markets collapsed around March and April, it actually protected our client's portfolios compared to the equities market by between 50 to 80%. And that was just with a 12% allocation to gold,”
A long-term approach
Investors can use gold in a variety of ways in a portfolio but Stockspot see gold as a long-term holding, a portfolio staple. While some clients may have questioned the inclusion in early years, particularly in 2014-15 when gold was falling after highs in 2011, those same clients appreciate the vision now.
“We really had to explain to clients that it was that a form of insurance… that actually you want gold to not go well in your portfolio, because that means everything else is doing really well. And you're probably getting great returns… On years like this year, we get the opposite…So we end up having to explain the long and short of not having too much gold, but having enough to provide a cushion in your portfolio, which is why we feel that current allocation of 12% is the right amount.”
Some commentators may wonder what the future holds for gold. While Mr Brycki personally believes momentum is set to continue, his view is to not make any predictions in portfolios and to manage for any scenario.
“Our philosophy at Stockspot is really that you shouldn't be trying to predict where things are going. You should just prepare for all the potential outcomes. Our portfolios really take that perspective of we never try to predict. We always just try to prepare because we think that puts our clients in the best position,”.
From that perspective, gold is a permanent and necessary allocation for Stockspot’s portfolios.
How much gold is enough?
Stockspot view a 12% allocation to gold as the right amount for their portfolios. This amount was set a few years ago and was an increase on their previous amount.
“we saw that the correlation between bonds and shares was moving from being more negative to being more positive, which meant that, in theory, bonds weren't going to provide the same level of protection in a share market fall. And that indeed happened earlier this year when the share markets fell. Actually, for a period of that fall, bonds fell as well until central banks got up and decided to stand behind the fixed income markets. And as a result, gold really did protect portfolios in a way that was advantageous and something that bonds weren't able to do.”
To hedge or not to hedge
Stockspot use ETFS Physical Gold (ASX: GOLD) for the exposure to gold in their portfolios. GOLD is not currency-hedged and for Mr Brycki, using an unhedged ETF was a deliberate approach.
“It’s not taking a view on the Australian dollar as much as it’s thinking about why you have gold in a portfolio. One of the key reasons is to protect your purchasing power in your own currency. So if you hedge your gold exposure, what you’re doing is protecting your purchasing power in someone else’s currency that really has very little relevance to your day-to-day income expenses, assets and liabilities. If for some reason there was a huge devaluation in the Australian currency, you wouldn't enjoy the benefit of that if you hedge,”
Taking the simple approach
The simplicity of gold is part of its appeal in a long-term portfolio for Stockspot.
“most investors think that by making their portfolios more complex, including more assets, they're going to give themselves better returns. Our view is actually the opposite and a lot of the evidence suggests otherwise and actually keeping things simple is better because simple is lower cost, simple as less risky and simple performs better.”
Stockspot’s view on gold as a portfolio staple extends to their recently launched kids’ portfolios.
“We take them on a bit of a journey where they can learn a bit about some of the companies that they're investing in. The great thing about investing is, as well as investing in things like gold, where there's a physical, tangible thing you can hold, you can also invest in great companies that you use every day,”
Easy access to a range of opportunities
Is gold one of your portfolio staples? Click the 'CONTACT' button below to find out more about ETFS Physical Gold (ASX: GOLD) and using gold in your portfolio.
MORE ON Investment Theme
1 stock mentioned
Kanish Chugh is responsible for distribution covering sales and marketing strategy for institutional, intermediary and retail clients. He joined ETF Securities in 2015 and has previous experience with Fidelity International, BlackRock and...