Dentists, jewellers and investors: three people making money from gold

If your children use Instagram or 'follow' the famous in some way, you'll no doubt be aware that 'grillz' are a bit of a craze amongst celebrities. Justin Bieber recently splashed out $15,000 on a pair: 'rose gold adornments, studded with light pink sapphires' – or teeth braces to you and me.

But while gold has little real-world use today beyond jewellery, it has multiple uses as an investment. A $15,000 allocation to it in your portfolio (or sterling equivalent) may be money better spent.
As Ned Naylor-Leyland, manager of Old Mutual Gold & Silver fund, pointed out in our latest Viewpoint magazine, gold prices tend not to move in lock-step with traditional equity or bond indices, so its inclusion in a portfolio can help reduce risk over the medium to long term.

It is one of the few asset classes to maintain its negative correlation at times of severe market stress, which leads many to look on it as a safe haven. For example, heightened geopolitical uncertainty helped push the price of gold up in recent months, as tensions escalated between the US and North Korea. However, given the asset class can experience periods of quite high volatility, we would argue that it is not 'safe' but is an extremely effective diversifier.

Gold is also viewed by many investors as an invaluable hedge against inflation (the rate at which prices in an economy rise). It is less susceptible to the loss of purchasing power (the amount of goods or services that one unit of an asset or currency can buy) over the long term, and it is finite in supply.

However, gold investing isn't just to insure against the bad times. Exposure to both physical gold and mining equities offers investors the reassurance of holding a physical asset along with the potential upside of mining equities rallying. The Old Mutual fund does exactly this. If the manager is optimistic about markets, he will hold more gold and silver shares and have less exposure to bullion, and vice versa if he is pessimistic.

A bright future?

Last month's update from the BlackRock Gold & General fund management team noted that global economic growth appears to be improving, which is likely to be supportive for broader equity markets and could act as a headwind for gold. However, there is also a lot of uncertainty in the world today, which doesn't appear to be priced into financial markets: the US and UK stock markets are both at or around all-time highs and interest rates on both sides of the pond may well rise before the year is out.

Over the longer term, BlackRock expects the gold price to trend upwards, as rising incomes in emerging markets support retail demand and the absence of new, large gold discoveries constrains supply. Gold equities are trading at attractive valuations today, as strength in the gold price has coincided with the companies having made strong progress in terms of improving their balance sheets and reducing costs.
All this suggests there is all the more reason to have at least a small allocation to gold and gold equities in an investment portfolio. I'm not sure what the going exchange rate is on a gold tooth at the moment, but I expect you'd also save the toothfairy from bankruptcy.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and those quoted and do not constitute financial advice.

Published on 04/10/2017