The Great Gold Debate

Question

Hey everyone

For background, I used to be with Stockspot when I first got started in ETFs. I've recently moved out of Stockspot's platform and onto Pearler, and have shifted my asset allocation to better suit my risk profile.

I was actually wondering about everyone's thoughts on Gold as a defensive asset, or one that is not correlated to shares? Stockspot has had quite a large allocation to GOLD (approx 15%).

There seems to be quite a debate around GOLD as an asset class, and I was wondering what people's thoughts were? Having been invested in gold for a short time period (approx 7 years) - I definitely noticed that in a diversified portfolio it did help smooth out returns, and tends to be oppositely correlated to stocks.

Chris Brycki from Stockspot seems to like gold  (i.e. good diversifier, hedge, insurance policy) (https://blog.stockspot.com.au/buy-gold/), whereas Ben Felix from PWL capital has a lot less of a rosy outlook - https://www.pwlcapital.com/will-gold-save-the-day/, (I.e. not an  income-producing asset, highly volatile etc.)

I'm sitting on the fence, and not too sure if I want to keep a small allocation to gold in my portfolio (say 5-7%)?

Answer

I’m not personally a fan of gold at all.  Over the long term (50-100+ years) it’s an unbelievable difference in outcome.

The S&amp;P 500 (which benefits from productive enterprise, innovation and produces cashflows and income) produced a total return of over 2,300,000%.  Yes, 2.3 million percent.  Gold, on the other hand, returned over 8,000%.  A tiny, tiny return in comparison.  The second chart (total return stock index) on this page shows it, just toggle the timeframe to get a greater perspective: https://www.longtermtrends.net/stocks-vs-gold...

Which makes sense when you think about it: one is owning a large collection of productive and dynamic businesses which make lots of money and grow over time… the other is a lump of metal which does nothing and produces nothing, it’s value is based on popularity.

Certain assets may smooth out returns, but at what cost?  Like insurance, holding other assets due to their non-correlation will be a losing bet, on average, unless they themselves have solid long term fundamentals built on cashflows like stocks and real estate do.

None of this to say what you should or shouldn’t do.  But it’s important to understand the two are fundamentally very different, and so are their long term return outlooks (30-100 years).  Hope that helps.

Answer

G’day Julian,

Disclaimers first: I work for a company that advises on shares (in the context of personal finance) so assume I’m biased. I don’t think I am — I prefer to make money, and blinding oneself to opportunities based on pre-determined ideology isn’t a great way to do that! — but subconscious biases are, well, subconscious. Also, I work for a company with a general (as opposed to personal) financial advice licence, so I can’t give you personal advice!

Right… with that out of the way…

I’m a long term investor. I have literally no idea what any asset class will do in the short-to-medium term. (Nor do I think anyone else does, despite what they may believe, btw!). So, my thoughts are through that long term lens.

Gold is an inert ‘thing’. It produces nothing, let alone revenue or profit. Perhaps more people will ‘want’ it in future. Perhaps they won’t. But that’s essentially the only basis for making an educated guess. And it’s not — as a result — something I consider an ‘investable’ asset (as opposed to a ‘speculative’ asset or something else).

And here’s the thing. As Dave Gow has already pointed out, it hasn’t been a great long-term performer and I see no reason for that to change. Maaaaaybe it’d help make a portfolio less volatile (but it may not), but for mine, the right lens is not ‘volatility minimisation’ but ‘long term return maximisation’.

It’s very hard for me to believe gold adds to the long term return potential. It’s more likely, IMO, to detract (opportunity cost) from higher returning assets.

Just my 2c.

Scott Phillips.
CIO, The Motley Fool

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