Core holding in portfolio should always be bullion

PUBLISHED : Monday, 26 November, 2012, 12:00am
UPDATED : Monday, 26 November, 2012, 9:35am


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The attraction of equities and other financial instruments will rise and fall with the tide, but investors can always bet on one sure thing: as a long-term play, gold will never lose its lustre.

The financial crisis and its aftermath have again proved the point. However, as fund managers and sector experts are quick to emphasise, the yellow metal should not simply be seen as a safe haven when other asset classes are heading south.

No matter the economic climate, gold makes sense as a core holding in any investment portfolio. That applies to central banks as much as to hard-working individuals trying to build a retirement nest egg. And, with an expanding range of choices, including themed funds and exchange traded funds (ETFs), as well as physical gold, private investors can pick a method to best match their wealth and temperament.

"In a world where central banks can introduce measures like quantitative easing, holding real assets definitely makes sense," says Dominic Schnider, head of non-traditional asset class research for UBS Wealth Management. "Also, the price gravity of gold is very limited because you don't have the substitution forces of other commodities."

To illustrate, he notes that should natural gas prices go up quickly, power suppliers could potentially switch to coal. But, while demand and prices for gold will inevitably fluctuate, its appeal and status remain unchallenged.

The latest quarterly report from the World Gold Council makes that clear. It shows third quarter demand at close to 1,085 tonnes worth US$57.6 billion. That represents a 3 per cent jump in demand from the previous quarter, and though 11 per cent down on last year's record-breaking third quarter, the signs still point to sustained long-term demand for coins, jewellery, technology - and gold bars held by banks and ETFs.

"These days, the gold ETFs are very popular and will continue to be down the road," Schnider says.

He notes, though, that this option may not suit everyone. Investors should first ask themselves why they want to hold gold, and here personal psychology comes into play. Some people - those with a "bunker" mentality - will always prefer physical gold kept in a safe or under the bed against the day when the banks really do collapse.

Two other types are characterised by Schnider as "opportunistic" and "yield" investors. They will incline towards other instruments - funds based on mining stocks, physically-backed ETFs, custody solutions with the bank, or even selling put options in the gold market. A presumed plus point is that trades can be completed with a click from an e-banking account. But, as with any more complex financial contract, factors such as counter-party risk, management fees and market liquidity also come into play, even if not immediately discernible.

"Overall, as long as gold is viewed as a currency, the outlook is good," Schnider says.

Jeffrey Haindl, head of product management for Falcon Private Bank, is similarly positive about prospects. The bank launched a gold equity UCITS fund in July. Initially registered in Europe, it focuses on investments in companies engaged in mining, processing and refining gold. Assuming monthly returns continue to climb, future plans could include investment in retail-related stocks and wider registration, so that more Asia-based investors can participate. "It was good timing; the fund was up 3.6 per cent in August and 16.5 per cent in September," Haindl says. "Over the past year and a half, there has been a bit of a divergence between gold bullion prices and gold mining equities. Investors have begun to recognise there are some good buying opportunities."

Douglas Groh, co-portfolio manager for Tocqueville Asset Management, picks stocks for the fund. He notes that many mining companies have made significant strides in their management, corporate governance and production over the past 10 years which, at present prices, means they are technically undervalued.

"Our fund is actively managed and looks to capture value in smaller and mid-cap companies," Groh says.