Not everything that glitters is gold

Photo by  Amy Shamblen  on  Unsplash

In our trainings, we are currently quite likely to be asked: "Is this a good time to invest at the moment?" Or "The news are currently full of falling stock prices and the economic crisis - should I really invest in stocks?". I myself have to admit: when I review my investment portfolio, the performance of my investments in the MSCI World Index for 2018 does not look impressive. I myself wonder: should I better put my money into other investments, such as gold?

What is gold?

Gold has been a known commodity for 7000 years. The metal was found in Egyptian tombs and was mostly used as jewelry. Over time, it became a means of payment - value and quality predestined it for this particular purpose. The global gold deposit is small and therefore contributes to its value. The volume of gold currently available fits into a 20 meter x 20 meter cube-shaped office building. Unlike other metals, gold can be split relatively well thanks to the melting process. You are most likely familiar with gold taking the form of bars or coins. The value of gold also stems from the fact that it neither oxidizes nor rusts. Money eventually replaced gold and silver as a means of payment. For a long time central banks had to hold the equivalent of money in gold to back the money in circulation. This has changed in the last century: since 1971, the US dollar has been decoupled from gold.

Is it worth it to invest in gold?

There are diverging opinions: Critics complain that historically gold has only generated half the return of equities. According to the magazine Finanztip, gold generated 4% annual return between 1975 and 2018. In comparison, the MSCI World stock index generated approximately 8% annual returns per year. Also, the price of gold fluctuates more than equities - this represents a risk. Gold also does not produce regular yields. You only earn returns by buying and selling your gold. This is different from bonds where you earn interest, or real estate where you generate additional income by renting out an apartment or house. Proponents of gold in turn point to the worldwide acceptance of gold. Ex-US Federal Reserve Chairman Alan Greenspan is such a proponent: "Gold is the ultimate currency in the world, gold is widely accepted." Fans of gold like to refer to the small amount of gold as one of its core values. The metal is classified as crisis-proof: during the past financial and economic crises, the values of gold and equities did not rise or decrease in the same manner. The price of gold and stocks often do not move in the same manner, they have a low reciprocity (correlation). Thus, gold is suitable for the diversification of your portfolio. You certainly remember why you should diversify: to get a broad portfolio and to evenly spread your risk when investing (that can result in a combination of stocks, bonds, real estate, or even commodities like gold). Ray Dalio, a famous US investor (and founder of the hedge fund Bridgewater Associates), as well as the author of the German book "Investing Sovereignly with ETFs," Dr. Gerd Kommer, propose to hold gold as part of an investment portfolio. As part of the "World Portolio" he designed, Dr. Gerd Kommer recommends to hold just under 7% of the portfolio in commodities (gold). And as part of his "all-weather portfolio," Ray Dalio advocates covering 7.5% of the portfolio with gold. The newspaper Finanztip proposes a maximum of 10%.

You already understand that there are advantages and disadvantages. Holding gold pays off as part of an already diversified portfolio.

Just make sure to not only invest in gold!

What do I need to do when I want to invest in gold?

You can invest directly in gold by buying a (piece of a) bar or a gold coin. This is possible via portals like Currently, the gold price is € 1,127.48 per ounce (1 troy ounce ≈ 31.10 grams). A 1kg gold bar costs about 36.348,06 €. You can buy a 0.5 g "heavy" gold coin from just € 36 and 1g of a bar from € 40 (as of Jan. 2019). When buying, you decide whether you want to hold the gold yourself (then the bar or the coin will be sent to you) or whether the gold will be kept in a vault (by a bank or another provider). Should you choose the second option, you pay fees for renting the safe.

Note: If you buy gold worth over 10,000 €, it's worth keeping it in the vault. That costs about 60 € per year. If you invest less, then you can keep it at home. In that case, please insure it as part of your household contents.

Alternatively, you may purchase gold indirectly via ETCs (Exchange Traded Commodities). And this is how it works: on the stock market, you invest in a bond that is linked to the performance of commodities. Just imagine, you lend money to the counterparty (also called the issuer) to buy gold (hence the bond). There are physical ETCs: the counterparty buys "real" (physical) gold. Or you can invest in performance: you benefit from the development of gold without actually buying the metal. For ETCs, the risk is higher because your counterparty (the issuer) may counterfeit and you loose your money. For physical ETCs, this risk does not exist because the issuer must physically buy and store the gold. But again, how do you get access to the physical gold in the worst case scenario? Therefore, the risk of ETCs is rated higher than physical gold (which you buy as a coin or bullion).

In a nutshell

It makes sense to bid on gold if you use it to diversify your investment portfolio (up to 10%). Especially in times of crisis gold can shine. We would not rely on gold as the sole investment because, as described above, gold prices fluctuate more than stock prices and also produces lower yields in the long run. In essence: It is not all gold that glitters. But not everything that shines is gold.

Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson)



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