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To consider a gold investment, you may be concerned about a bear market, stock market crash, or you might just want to preserve capital through a defensive asset. Gold may also be an asset to hedge against inflation or market irrationality. Investor’s interest in Gold has dwindled over recent decades, and some may consider it an alternative investment.
In this video, I will cover what Gold is as an investment asset. This includes why you may want to invest in Gold and how you would go about investing in Gold. On the contrary, I will also address some concerns that market commentators have about investing in Gold.
Since December, the Google Trends Search term “Gold Investment” has gone up over 200%. This is related to investors being concerned about the Federal Reserve printing money. It is a commonly held economic’s principle that an increase in the money supply leads to inflation. In addition, the stock market is considered irrational based on the 35% sell down on the Dow Jones followed by the recent rally. I plan to dust off the Bachelor of Economics and understand Gold as an asset class.
Topics covered in this video:
– Gold is a base metal which has become a tradeable commodity.
– Society’s view as to why Gold is a store of value is based on the early stages of international trade. In a commodity economy, directly trading assets was a challenge. Gold and other precious metals (Silver & Jewels) were selected as stores of value based on their scarcity.
– Gold became a challenge to store, so an early banking system was formed to hold gold and issue IOUs. This is similar to the, now defunct, gold standard.
– The gold standard is when a country’s currency is backed by gold reserves.
– Gold has maintained its store of value due to its scarcity, it has continued to be widely traded and liquidity on the market.
– Financial commentators do flag some concerns around Gold which include that there is no yield on the investment, there are limited practical uses for Gold, it could be volatile as an asset, and there is some risk/cost when storing Gold.
– There is also some debate around if Gold is negatively correlated with negative returns, and there is an opportunity cost when investing on Gold whereby the investor could invest in other assets.
– My counter-argument is that in a trading position gold in the short term does more than likely negative correlate with financial markets. I am not aiming to hold Gold for yield; it is a temporary position.
– My hypothesis of investing in Gold is to hedge against inflation.
– Currently, central banks around the world are printing money. Money printing can lead to inflation.
– There are four main ways to invest in Gold.
– The first is direct through Gold Bullion. This is the most direct investment where you hold the asset – this is an advantage as you can trade the store of value. The disadvantage is the storage.
– The second is a gold ETF, whereby a third party buys Gold related assets, and you can buy and sell a portion of this third party’s pool on the stock market. You will be taking on ETF risk.
– The third way is through buying gold mining companies. This could be more leveraged to the price of Gold. However, you do take on the business risk, and you aren’t buying Gold directly.
– The fourth way is through a Unit Trust or Managed Investment Scheme through a third party that goes out and pools investor funds to buy Gold assets. This has lost favour with investors as ETF have taken over.
– The Perth Mint does offer an interesting ETF which is similar to a Gold Unit Trust. Different to an ETF you can request that the Perth Mint provides you physical Gold in specie instead of selling the ETF on the stock market. The Perth Mint is also backed by the West Australian State Government.
