Words on Wealth: Investing in gold: cases for and against

Many investors turn to gold as a “hedge” against falling or volatile equity markets.

Many investors turn to gold as a “hedge” against falling or volatile equity markets.

Published May 28, 2023


Last week, exploring gold as an investment, I dug up some interesting facts about the yellow metal and looked at the history of the gold price over the last half-century.

Today I focus on the pros and cons of investing in gold and the direct and indirect ways in which you can invest.

Many investors turn to gold as a “hedge” against falling or volatile equity markets. It’s a widely held perception that there is a strong negative correlation between equities and the gold price: when one goes up, the other goes down. But it’s more complicated than that because other factors are involved, such as dollar strength and inflation.

In response to a question on the Quora platform, Aaron Brown, a former risk manager at AQR Capital Management in the US, showed that, since 1968 at least, there has been no significant correlation between the gold price in US dollars and the S&P 500 Index, which incorporates America’s 500 biggest companies. “Sometimes both go up, sometimes both go down and sometimes one goes up and the other goes down. You see big and small moves of both types. Statistically, the correlation is not significantly different from zero. It’s true that financial crises often make gold go up, causing some inverse relations. On the other hand, high inflation tends to put both prices up, at least in nominal terms, leading to some positive relation. But mostly gold responds to things that aren’t crucial to the stock market,” Brown says.

A spectacular example of a crisis when gold and stocks moved in the same direction (straight downwards and then up again) was the March 2020 Covid-19 crash.

Yay or nay?

Professional investors appear to either love gold or hate it. In fact, two of the most famous investors in the world, Warren Buffett of Berkshire Capital and Ray Dalio of Bridgewater Associates, represent these opposing camps – and you can watch numerous videos on YouTube of these gentlemen expounding their views. Essentially, Buffett sees gold as a useless investment, because it is a non-productive asset. He says a productive asset, such as property or a listed company, “will kill a non-productive asset over time”. Dalio, on the other hand, recognises the diversification potential of gold in an investment portfolio. He says gold is a worthwhile alternative to cash because it acts as a solid store of value, which is necessary in a world of high debt levels and government stimulus programmes.

The difference is the investment time frame. Buffett’s “buy and hold” approach to investing has paid handsomely for his company, so he naturally would not see any long-term benefit in holding gold. Dalio is a hedge fund manager, so he is more interested in shorter-term moves in markets, and in this context he views gold as good.

As I pointed out last week, gold cannot match the performance of the stock market over the long term, especially when you factor in share dividends. But you may lean towards Dalio’s view if you have more short-term considerations. (Disclaimer repeat: this column does not constitute financial advice. If you are considering changes to your investments, you should consult a qualified financial adviser.)

There are a number of direct and indirect ways to invest in gold.

* Gold bullion: gold coins such as Krugerrands or miniature gold bars may have certain attractions, but I’ll highlight some of the disadvantages. You’ll need a secure safe in which to store them and will have to pay to insure them. And then there’s the “spread”: the difference between the buying and selling price on any particular day. At the time of writing, one bullion website was selling one-ounce Krugerrands for R40 067 and buying the coins at R37 799. The -5.7% difference factors in the cost of minting the coin, the dealer’s commission and any extra admin charges. One positive: there is no VAT to pay – Krugerrands (of gold but not other metals) are zero-rated for VAT.

* Exchange traded products: there are exchange traded funds (ETFs) and exchange traded notes (ETNs) that track the gold price, the difference being that whereas ETFs are backed by actual assets (in this case a store of physical gold in a vault), ETNs are not – they are debt instruments.

* Shares in gold mining companies. Instead of investing directly in gold, you could invest in a company that digs it out of the ground. The main consideration here is that, when the gold price rises, gold miners tend to benefit by a multiple of the price rise, because the cost of mining the gold doesn’t change. But they have those same costs when the gold price drops, sending the share price barrelling in the opposite direction. Another consideration is that it’s normally not just gold they are mining, with the biggest companies being quite diversified.

* Unit trusts. Although the resources sector as a whole is well represented by unit trusts, there is only one actively managed fund in South Africa that focuses on gold – the Old Mutual Gold Fund. This is a worldwide fund that invests in gold miners globally, with about 70% invested locally and 30% offshore.

Hesse is the former editor of Personal Finance