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Point of View

Gold may need more than Trump to be great again 

By Matthew Brittain, Investment Analyst

Even though gold has been used to preserve wealth for over 5000 years, it still polarises investors. Having pulled back from both its all-time, and recent, highs we thought it would be an interesting time to wade into the debate and give our point of view.

Since gold pays no coupon and earns no profits it is extremely difficult to value because there are no cash flows to discount and compare against other asset classes. This is compounded by the fact that all the gold ever mined is still sitting in a vault somewhere - not being used up – leaving the possibility of unfavourable supply demand imbalances especially now that currencies are no longer pegged to it.

The way we look at gold is simple. We see that it has diversification value, in that it is one of the few investments expected to rally when risky markets fall, but like any insurance we want to make sure we are getting a good price when we buy it. Ultimately we believe that gold will prove a good store of value over time and protect holders from the corrosive effects of inflation. So while the price of gold will trade at prices far above and below this trend, ultimately our expectation is that gold is unlikely to do more than maintain its purchasing power over the very long term.

Real price of Gold

Real-price-of-gold-(1).PNG

The above graph is the US Dollar price compared to a price adjusted by US Consumer Price Index. Clearly it is not low. One could argue that we should use gold mining inflation as the deflator instead, which may give a slightly different answer, but would still not reduce the real price of gold to “low” territory.
 

Pattern

It has peaked in 2011 and we would argue that the primary trend is down. Obviously the gold price will move appreciably in the direction opposite to the trend for significant periods of time but we are usually uncomfortable to go against the structural trend without a compelling valuation supporting the investment case.
 

Conclusion

Most asset classes are trading at elevated prices relative to their historic norms. Therefore there are no obvious alternatives that provide both decent prospective returns and diversification. Because gold has a track record as a protector of value, stretching back millennia, and in a selloff it is likely not only to be a safe haven but can also attract investment flows, we must not dismiss it lightly. However the price would need to fall significantly before we consider it seriously as an investment opportunity.
 

Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependent upon individual client circumstances and may be subject to change.

Sanlam is a trading name of Sanlam Wealth Planning UK Limited (Reg. in England 3879955) and English Mutual Limited (Reg. in England 6685913). English Mutual Limited is an appointed representative of Sanlam Wealth Planning UK Limited which is authorised and regulated by the Financial Conduct Authority.

Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol, BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.