Buy Gold?

Friday, Jan 04 2019 by

Following my Next Stock Market Crash post, painting a dooms day picture for the US, I thought worthwhile giving some views on what asset(s) might perform best - and what others think might do well (please comment below).

As we all know the US is overdue a recession. That led to my first piece of digging, what US sectors performed best in the Dot-Com crash and 2008 crash?

Well, other than Consumer Staples in the Dot-Com crash (+1.2%) all other sectors each time have been negative; ranging from -17.2% (Health Care Dot-Com) to -81.9% (Technology Dot-Com). Therefore, applying that history lesson, my view is that no sector is likely to perform well during the next recession. That leads to looking at what asset has performed best during recession.

Since 2001 - H1 2017 every time the S&P500 has produced a negative annual return the annual return of Gold has been positive.

From 1970 - 1980 Gold was up c 2,300% whilst the S&P500 returned c 14% (ex-dividends).

From late 2004 to early 2012 Gold returned c 255% vs a 9% return for the S&P500.

Certainly Gold has historically performed well in difficult market environments. Since late 2011 to late 2018 Gold has returned -34% whilst the S&P500 and FTSE100 have returned 134% and 34.50% respectively (ex-dividends). Clearly, Gold has under-performed in the last 7 years.

Given the market conditions and what's the on the horizon, could buying Gold now / increasing exposure gradually be a good idea?

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All information is for Educational purposes only. It is not to be taken as buy or sell decisions or financial advice.

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27 Posts on this Thread show/hide all

Mohammed Malik 4th Jan 8 of 27

Diversification - definitely - have 5 - 10 % Gold in a portfolio.

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jonesj 5th Jan 9 of 27

I hold Ishares Physical Gold ETC (LON:SGLN)
Needed something quoted in sterling so my broker will not charge 1.5% forex on a USD transaction..

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Zoiberg 5th Jan 10 of 27

In common with Donald Pond, I too like the leverage offered by miners. The price of gold in mid November was around $1200/oz and is now $1284/oz . This is not a big deal in itself but for a company like Centamin with an AISC of $900/oz it translates to a 28% rise in profit vs AISC (revenue – aisc). The company has physically done nothing to produce this change, so most of it will appear in the net profit which, by this crude calculation and using Stockopedia's figures roughly trebles.

Go on, do the math !

I know this is a simplistic view but it worked well for me with Griffin Mining earlier in the year on the back of a rising zinc price.

Just be quick to get out when the price starts to fall as the leverage goes into reverse. The various mining websites can give an early warning here with their attention to predicted supply and demand although with gold you also have to factor in the mood swings of Donald Trump !

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Zoiberg 5th Jan 11 of 27

For revenue-aisc read gold price - aisc.

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jonesj 5th Jan 12 of 27

In reply to post #432958

1 A long term & sustainable price increase in Gold might move gold miners share price in proportion to the profitability increase, however in practice it's just another fluctuation in a volatile commodity, so surely we cannot guarantee that a 28% increase in expected earnings would immediately be baked into the share price ? If you know of some good correlation study or other evidence, l would be delighted to disconfirm my ideas on that.

2 One reason to hold gold would be non-correlation with stock prices. Owning gold stocks would presumably dilute that.

Finally, there is a case for having some modest sum in Gold sovereigns. That has more protection against a severe financial disruption AND these are CGT tax free. Since there have been past examples of governments banning gold holdings, it follows that you might even want zero traceability on purchases - easily achievable with certain stores in London.  Obviously for a buy and hold portion of the pie, as dealing costs are way higher than ETFs 

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Zoiberg 5th Jan 13 of 27

JonesJ . The point of my comment was to point out the very high gearing involved with miners which is probably under appreciated. On the other hand, gold has risen by about 7% since mid November and Centamin by 20%.

Food for thought not a scientific theory.

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herbie47 5th Jan 14 of 27

In reply to post #432873

I just checked my USD ETF and as it's listed on the London market I did not pay any forex charge, so it does vary between brokers.

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mmarkkj777 5th Jan 15 of 27

Ok, so a Gold ETF, a miner of the yellow metal and some Krugerrands for the kids/grandkids.

So now I need to choose which ETF and which Miner. Maybe GBSS for an ETF. Now just need to pick a gold mining stock with the most stability and potential.

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jonesj 6th Jan 16 of 27

In reply to post #433008

Gains on Krugerrands are taxable but gains on sovereigns are not.

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Alanjames999 6th Jan 17 of 27

I've been slowly accumulating physical gold for a while, it's a great way to gradually accumulate wealth over time and you get something tangible.

As Jim Rickards says Gold, Land and Art for wealth preservation. :)

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Andrew L 6th Jan 18 of 27

You would have to be stark raving bonkers to buy gold as a long-term "investment." Just saying!

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mmarkkj777 6th Jan 19 of 27

In reply to post #433163

hi Andrew,

I don’t know about anyone else, but I am considering it as an alternative to cash while I’m out of the market. Seems pretty sensible given the gold vs market comparison since October, And I can convert a gold etf back to cash very quickly when I want to. So, what’s the problem?

I was already considering a few coins as gifts as they are nicer than cash and more tangible than shares in an acct. Not really an investment for me.


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Alanjames999 7th Jan 20 of 27

In reply to post #433163

You sound like Gordon Browns advisor ;P

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donald pond 7th Jan 21 of 27

As mentioned in the post above, over the last 15 years gold has managed, in sterling terms, just under 12% pa. Not sure why having a portion of your wealth in something uncorrelated to the markets producing that return is bonkers. I can only assume you haven't researched the issue at all.

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timarr 7th Jan 22 of 27

As mentioned in the post above, over the last 15 years gold has managed, in sterling terms, just under 12% pa. Not sure why having a portion of your wealth in something uncorrelated to the markets producing that return is bonkers. I can only assume you haven't researched the issue at all.

Why would you just look at 15 years when you can look at a thousand? :)

Broadly gold isn't an investment, it doesn't yield anything and it has no intrinsic value. What it is, is a very effective store of value which has maintained its purchasing power over a thousand years.  However, picking a specific 15 year window in which gold has done a pretty good job ignores that fact that there are many other 15 year windows in which it hasn't.

For example, between 1971 and 1980 gold provided a 33.6% compound annual return. Between 1980 and 1990 it lost 4% per annum. In technical terms, it's an insurance asset: you should expect it provide above average returns when other assets fall. And, unsurprisingly, over the long term the return on investment is near zero - slightly below if you account for storage costs.

Basically, there are many good reasons for having gold as part of your portfolio, but as a long term investor market beating returns aren't one of them.


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Carey Blunt 7th Jan 23 of 27

I also hold Ishares Physical Gold ETC (LON:SGLN) as a hedging strategy to general downturn.
All the physical gold ETFs seemed pretty much the same as long as you buy one in GDP and avoid the forex charges.

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Jack Corsellis 7th Jan 24 of 27

Carey, have ever had problems with liquidity when going from your gold ETF to cash?

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Carey Blunt 7th Jan 25 of 27

In reply to post #433288

Not yet, but then i've only really been buying into the ETF since December. Not sold any yet.
In general I plan to buy into the ETF in small chunks as the market conditions continue to deteriorate (its my thesis that it will continue to deteriorate).
I would plan to sell ideally just before market conditions start to improve but realistically (as no-one can time the market) in small chunks over time as the market improves.
Its a hedge rather then a specific capital growth strategy so even if there are liquidity issues (unlikely in the small amounts I am dealing with) then it maybe reduces the effectiveness of the hedge but I won't know that for a while.
Its something of an experiment for me, I have no downturn strategy and this is the first part of formulating one.

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sirfrank 7th Jan 26 of 27

Fully $US hedged to GBP - ETFS HEDGED GOLD ETC (LON:PBUL). Keep an eye out!

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mojomogoz 7th Jan 27 of 27

Well, first of all, gold is as mad as an @r$e full of smarties (I use the phrase for its dissonance not its shock). Got to put things into perspective. There's so much uncertainty of what its actual role and value is. What's its reference point? How can one check its value relative to other things. Getting it price in other things or some long term trend does not provide a stable or predictive basis.

However, I think this lack of relatable value combined with its undoubtedly perceived value (from punters to central banks) is the gold dust. Think of it as a sort of reflexive thing to how we perceive the stability of our own reality. The valuation of the non gold world is really a slow moving relative value window. Over long periods of time significant economic and social innovation means the future is massively dissimilar from the past. For example, imagine in 30 years time we have large and small fusion generation capability. Boom! The economic and social order is many magnitudes of order different than today - probably on a scale that compares 1750 to 2000....yuuuuuggge.

We are in a window in time that has acute transitional uncertainties. Debt levels. Societal distribution. Rise of the east, decline of the west. Is the US healthy enough to sustain the dollar and dollar debts and markets as the global safe haven or is the US undergoing a demise similar to the UK's first half of C20th? All this flux in perception and relative value judgements it underpins is a boon for gold IMO. As these uncertainties or transitions appear then so will gold gain credence as a sort of certainty (remember, its as mad as an @r$e full of smarties so this certainty may well be a glorious chimera).

There is a chance as China and others rise and the west dips that gold is not a chimera. The RMB is not going to replace USD any time soon as the global currency as the Chinese would need to open up (and probably run massive deficit) and they are not ready for that economically, socially or politically and maybe never will be as this is a different beast from western capitalist democracy. However, they do not want to be beholden to USD global pricing of goods and services. Using gold as a reference perhaps along with basket of currencies may be a way round this (there are hints at this already). It could be a blinder of a move by the Chinese in that they have too much debt (intrinsically USD related even if mostly RMB priced). But China is both the biggest owner of gold and biggest producer. There may be an opportunity to use gold related pricing to power a new Chinese consumption economy and let the old export excessive (bad) investment economy to wither away without creating a classic emerging market debt crisis.

Anyway, down to practicalities.

I own Shanta Gold (LON:SHG), Pan African Resources (LON:PAF), Caledonia Mining (LON:CMCL), GDX and GDXJ ETFs and Ruffer Gold fund.

My stocks all have Africa related risks and are very undervalued IMO. I want the Africa risks so not accidental (political and societal cycle calls with the fears well in the price). I like gold stocks as I think from a view entirely separate from gold the commodity they are at the bottom of the capital cycle process when most things in the world are nearer the top of the cycle (where hubris and then future loss are imminent). In this situation I prefer to own the stocks than the commod. I have the other collective investments in case my stock calls are dodgy. The exposure is roughly 50:50 stocks:collective. If I started today I could pobably choose 3 better stocks but I'm not going to trade around these little things. Shanta is quite timely IMO with immediate upside due to debt and operational turnaround. Caledonia is a quality growth company. Pan African is misunderstood as is a gold factory not a miner so much as it was. DOYR

Note, in the example of fusion above used for power generation in 30 years time you definitely don't want to be holding gold into to the acceptance that fusion generation will happen. You want to sell it on the first rumblings its real as the value relationships in society will be totally overturned by this. After all, the economy and value it creates is simply a story of excess energy and the transformation of that energy into goods and services we appreciate. Fusion is abundance on a scale unparalleled.

That is my story on the mad stuff anyway ;)

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