The gold price has soared around 25% over the last year, meaning the yellow metal has outperformed equities by a wide margin. That kind of performance has got me questioning whether I should buy gold for my ISA. Here, I’ll weigh up some of the main advantages and disadvantages.
Advantages of gold
One of the main advantages is it can provide portfolio protection. Because it’s considered to be a ‘safe-haven’ asset, investors tend to gravitate towards the precious metal during periods of economic uncertainty, or heightened geopolitical risk, which can push its price up. For example, during the Global Financial Crisis in 2008/2009, the price of gold surged as global stock markets plummeted. Given the economic and political uncertainty the world faces right now as a result of Brexit and US/China trade wars, owning a little bit of gold as a form of portfolio insurance could be sensible, in my view.
Another major advantage is it can help improve portfolio diversification. Gold tends to have a low correlation to other major asset classes, such as equities and fixed income, meaning it can help improve the overall risk/return profile of a portfolio. Given that the bulk of my ISA portfolio is in equities (both UK and global stocks), gold could potentially lower my overall portfolio risk.
I’ll point out that gold is often seen as a ‘store of value’ as well. Bulls argue that it provides protection against currency devaluation. However, personally, I’m not so convinced it is a great store of value. I say this because the gold price can fall as well as rise. For example, if you had bought the metal in 2011 at a price of $1,800 or higher, you’d still be sitting on a substantial loss today. That’s not exactly a store of value, is it?
Disadvantages of gold
On the downside, one of the main drawbacks that it doesn’t pay any interest or income. For me, this is a bit of a sticking point as I like my assets to generate an income stream. That way, I can reinvest my earnings and compound my wealth over time. As Warren Buffett says, it “doesn’t do anything but sit there and look at you.”
Gold is also hard to value. Because it doesn’t have any earnings or cash flows, we can’t use valuation models, such as discounted cash flow models, to work out its intrinsic value.
Should I buy?
All things considered, I can see the appeal of owning a little bit of gold in a portfolio as a hedge against economic uncertainty. I wouldn’t invest a large proportion of my portfolio in the precious metal, however. A small portfolio allocation of, say 5%, could be a sensible move as it could help improve my overall risk/return profile.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, “10 Steps To Making A Million In The Market”.
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.