Yes, go for gold but weigh the bullion against other options

There was much buzz on Monday about gold. The New Gold Exchange Traded Fund (ETF) went live at the NSE. In part, the excitement stemmed from the fact that gold (bullion), perhaps more than other investment, holds a special kind of appeal.

Since 2003, when the first gold-backed exchange-traded product was listed, investors have never stopped flocking into the precious metal.

Nowhere was this witnessed than in the wake of the 2008 crisis. As global economies faltered and markets tumbled, gold prices rose to an 11 year peak of $1,921.17/oz in 2011.

This year alone, the metal is up some 10 per cent. Without a doubt, there’s something special about this precious metal that keeps tapping deep into human psychology.  

That said, several things were said during the launch that I did not agree with or, at least I do not share the same opinion.

First of all, gold is not an investment asset. In my view, just like any other commodity, buying the gold ETF will only be for speculation on future price movements.

In contrast to buying shares in a company, investors are not going to get a part of an ongoing business or purchase future discounted cash flows or profits. Investors are not going to receive dividends or benefit from share buy-backs.

Investors ought to think of it as a currency allocation.

Secondly, the assertion that gold is an inflation hedge, may not be entirely correct. In the 10 year-period ending last year, Kenyan inflation has averaged about 8.2 per cent while gold’s compound return averaged 6.3 per cent in the same period – that’s a negative return of 1.9 per cent.

Now, perhaps in the long-run this may turn out to be true, but whose investment horizon stretches out two millennia?

Gold would’ve also done particularly badly compared to government securities.

During the same time, the 91/182/364-day averaged 8.3 per cent, 9.4 per cent and 10.3 per cent respectively. That’s another way to say that the short-term treasuries were a better store of value than the much-praised bullion.

Thirdly, gold is not less volatile. Take for instance, since reaching its record high (September 2011), it went on to lose over 40 per cent of its value in just four years.

Then in the first half of 2016, investors started buying the metal again, pushing it 12 per cent up to date. Now, if this is not volatility then I don’t know what this represents.

Having said that, gold fans can now rejoice that they now have a vehicle the Central Bank cannot produce at will. Surely, the ETF will go a long way to help diversify portfolios.

Diversification into different asset classes will always be the golden rule. As a start, investors can place 5-10 per cent of their portfolio in the precious metal.

If the current market turbulence continues, I suppose gold could expand the gains it’s made so far this year and possibly even get back to or exceed its peak. On the other hand, if stocks revive and fears of an economic slowdown subside, investors may shun the ETF and its price could stagnate or decline.