All that glitters is not gold

All that glitters is not gold

31 July 2020

A number of people have asked recently for my thoughts on investing in gold in today’s current economic climate, with regards to the COVID-19 Pandemic. In most cases, these questions have been driven by concerns about inflation and the much-reported rise in the gold price in recent months. Of course, no one really believes that Advisers should be able to predict the future, so in most cases will be happy to rely on the fact that I truly enjoy exploring, studying and reading about the different types of investments and asset classes. 

I began this piece answering, “Should I invest in gold?”, but the more I thought, wrote, re-wrote and deleted, it became apparent to me that perhaps a more insightful question is “What makes a good investment?” I’d like to offer my top four criteria I look to when it comes to deciding where to invest. Before I go into the specifics of this question, I must clarify that the overriding rules of proper financial planning remain in place: Develop and stick to a plan, diversify broadly to avoid targeted risks and avoid reacting to the flavour of the moment or the doomsday of the era.  

#1 The aim of an ideal investment should be to own it forever 

If it’s not for the long term, it’s either contingency planning (potential short-term needs) or speculation (making the most of a perceived opportunity). Both can have a place in a robust financial plan; the former may need to cover unexpected emergencies such as a boiler breaking down or redundancy while the latter should only be done with money that we can afford to lose.  

If you can visualise an asset providing for your future, paying an income to fund your lifestyle or making withdrawals to gift to family then it’s on its way to being a good investment. If, on the other hand, you visualise selling it on in the short term (anything up to 5 or even 10 years) it is likely to be teetering towards speculation.  

#2 True investments are powered by optimism, and not driven by fear.  

Short term movements in prices within any market can often be driven by two emotions: fear and greed. However, where we are long term investors (see point 1 above), then the optimum characteristic in our toolbox is patience.  

The world economy is far from perfect and seismic events will always occur and impact our lives and the value of our wealth. But if history has taught us anything it is that we (humans) have an incredible ability to create, build and solve, often following a disaster and usually via businesses. No inert metal has the ability to create a solution out of nothing.  

The transfer of money into gold has often been driven by a fear of stock market behaviour. Investments should be made at a time of sound mind and clear decision-making ability and so, if the reasons behind investing in gold is because of the hearsay of it being a good hedge against inflation, I’d encourage anyone to reconsider their thoughts. 

On that note, I’ll provide the simple figures below: 

Between 1980 and 2020, Gold went up from $800 to nearly $2000 – a return of about 150%. During the same period, inflation went up by 333%. The MSCI world index (a proxy for all the companies in the world) went up by nearly 6000%.* 

#3 Invest in something that has a practical purpose 

There is more chance of gaining a return on your investment if you choose to invest in something that has a practical purpose, rather than a big ‘lump’ of something sitting there doing nothing.** For instance, land, property and even human brainpower are all investable assets. Over time, it is likely that they will continue to produce other practical uses. Land can be used to generate crops and to build property on. Human brain power is constantly striving to “create”.  

In the case of gold, it may look pretty, and perhaps become a stunning piece of jewellery, but aside from that, the main purpose of gold is to sit locked away until someone offers to pay more than the value it was bought for – which, of course is not guaranteed to happen. When considering a true investment, we mustn’t rely on the potential for someone else to pay more for it but for the potential of that asset to pay you.   

#4 Invest in something with the potential to generate growth and/or income 

Ultimately a main goal for many investors is to generate an income. There are many ways to achieve this: investing in property, a fixed rate saving bond and shares in companies, to name a few. Whilst there is no guarantee on the amount of income, you are increasing your chances of getting something back, rather than holding on to an asset in the hope that someone will offer more than you paid for it. Chances are, if it is a physical asset you paid a high price for in the first place, you’ll need to spend more money storing it, insuring it and keeping it safe.  

A closing thought 

Having looked back through the article above, I’ve realised that the 4 “rules” back up the idea that the best investment you can make is in yourself. After that, let the other people with whom we share this planet create businesses and be a part of that by owning shares in great companies around the world. Property and land may in some situations also form part of your investment plan.  

Your contingency planning can be covered by cash and fixed interest assets – as long as they’re easily accessible, then giving up a bit of long term return may be a reasonable price to pay for a feeling of security – and at least you might get a positive cashflow in the form of interest.  

After all that is done, if there is money leftover then we might consider speculating, if it really appeals.  

Sources

*https://www.thebalance.com/should-you-buy-gold-3140477#citation-1 

**https://www.investopedia.com/ask/answers/021615/does-warren-buffett-invest-gold-why-or-why-not.asp