Episode 34

All that glitters: How precious metals, like Gold and Silver, work as alternative investments, and how they fit into an investment portfolio.

Welcome to Finance & Fury. Today we’ll be running through some alternative assets – precious metals, like Gold and Silver.

We’ll talk about

  1. How they work
  2. How they fit into an investment portfolio


Gold Price

gold prices

Silver Price

silver prices

Whilst they are very separate assets to each other, they work in a similar way. There has been increased volatility with shares in recent months, and this has led to an increase in gold and silver prices. They are considered an alternative growth investment; when other asset classes like shares, property and even bonds are doing badly, gold and silver are considered a “safer” way to invest.

History

  1. In between the periods of barter and modern-day credit cards and paper money, gold and silver (plus other rare commodities) were used as a medium of exchange, or currency. This however, was inefficient.
  2. In the past your wealth, and the government’s wealth was measured in gold, by weight.
    • Gold rushes – in 1851 people flocked to the Victorian town of Ballarat
    • If they found gold, they could exchange that for money
  3. Also used to back ‘paper money’ as the measure of intrinsic value
  4. Converted away from this in 1971
    • Now it’s rare for people to have stacks of gold bars lying around
  5. Today, people buy gold ETFs, or Bullion through a few companies
    • With gold, if demand increases, eventually price increases – this can work well when people are flocking to gold, away from other assets as they look for safety.

History of Price

  1. Rise of internet saw ability for average Joe to buy gold as well. Prior to this, access to gold was quite limited.
  2. The price has been more volatile since early 2000’s

Why is gold and silver good?

  1. Limited supply – Paper money today has potentially unlimited supply – at the Central Banks discretion
    • Government has debt in the trillions, Australia, the UK and most of Asia (other than China) are all up to their eyeballs in debt
      • Came from getting the money printed by issuing a debt instrument (bond) for the cash – but they also have to pay the interest back as well
    • Over printing creates pressure on the currency, increasing volatility.
    • Demand – If people buy gold, the price goes up
    • Supply is limited – you have to actually go and find the metals, and get them out of the ground, there are not many new sites being found. This is why they are considered ‘inflation proof’, retaining real value compared to fiat currency
  2. Diversification – Typically acts in an uncorrelated, or negatively correlated fashion to shares and property
    • As people get worried about property or shares, they may buy more gold
    • This pushes the price up
  3. Number of uses – not just investment which creates a more stable demand
    • Not just used as a speculative investment
    • Used in electronics, jewellery, medical
    • Gold has special properties and is very versatile

Disadvantage of Gold and silver

  1. No income return – Return solely based on demand
    • Income returns can pick up total returns on shares or property if the growth is low or negative.
  2. Only Growth returns…which is hard to predict
  3. If it’s in ETF form, good luck getting your gold! It’s all electronic through derivatives.

Buying it  

  • You can buy gold through an ETF, or some companies will store it for you.

Where it fits into a portfolio

  • Growth allocation – Mainly as a capital hedge
  • Constructing a portfolio, it might be suitable to allocate 5% or so into gold, but that doesn’t mean it’s right for everyone

In summary

It’s good as a long-term inflation hedge, and to diversify a portfolio out further, but can be volatile or non-performing (due to no income)

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