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Is It Time To Buy Gold As Grexit Looms?

Many fans of share ownership — me included — barely give gold a second thought. After all, over long periods of time, equities have outperformed all other assets.

The Oracle of Omaha

Legendary US investor Warren Buffett — in a 2011 letter to shareholders of his Berkshire Hathaway investment group — famously compared the entire world’s gold stock of 170,000 metric tons, valued at $9.6 trillion (pile A) with another set of assets costing an equal amount (pile B). Pile B consisted of all US cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually)”, and about £1 trillion spare cash left over.

He continued:

“A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty … Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond”.

Owners of gold, Buffett said, “are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future”.

If you didn’t already know, you’ve probably guessed by now that the world’s greatest investor doesn’t bother with gold!

Insurance policy

The argument for having some exposure to gold, put forward by many financial advisors — 5%-15% of your assets seems to be a common recommendation — is as a kind of “insurance policy”. Gold often does well during times of fear — when shares are typically falling — and, thus, can mitigate the decline in value your portfolio would otherwise be showing.

Buffett is not concerned about periods of volatility in equities, but if you are, you could consider adding some exposure to gold. Right now, there’s a good deal of uncertainty around. Will there be a “Grexit” or will the can be kicked further down the road in a “Fudge-it”? Why has the Chinese stock market gone haywire? These are just some of the questions on the minds of nervous equity investors.

Of course, you don’t really want to be buying a gold “insurance policy” when everyone else is avidly buying and the “premium” (price) is high. Perhaps surprisingly, though, demand for gold is muted right now. Apparently, the strong dollar is making the US currency the flight-to-safety asset of choice for the time being.

Gold is currently some 40% below its September 2011 all-time high of $1,921 an ounce. Over the last three years the price is down 27%, and over the last year by 12%. As such, now might be a reasonable time to buy your gold insurance policy, if you’re so inclined.

Choice

Many equity investors looking for exposure to gold will naturally think of gold mining companies. FTSE 100 giant Randgold Resources (LSE: RRS) (NASDAQ: GOLD.US) will be familiar to most. Rangold’s shares are down 28% over three years and down 17% over one year. That’s in line-ish with the price of gold, but the company’s earnings have declined more markedly than the share price. The miner could actually be an attractive buy, based on a forward price-to-earnings growth ratio of 0.9 for 2016.

However, investing in a gold miner — even a blue chip, such as Randgold — wraps up equity risk with exposure to the yellow metal, which isn’t really what’s wanted from an insurance policy. The point is only emphasised by looking at a fund, such as unit trust BlackRock Gold & General, which has 60 holdings, including Randgold at 10% of the portfolio. This fund is down 52% over three years and 22% over one year.

No, for an insurance policy — aside from literally buying lumps of gold — an exchange traded fund (ETF), which can be bought like any other share on the stock market, is probably the best option. ETF Securities Physical Gold (LSE: PHAU) simply tracks the movements of the price of gold (less the management fee), reflected in three-year and one-year performance figures of -28% and -13%. Unlike some ETFs that achieve the purpose “synthetically”, this one is backed by physical gold held by HSBC, each bar being segregated, individually identified and allocated.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended shares in HSBC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.