Do you remember the dark days of 2008 and 2009? When famous old banks were going bust, markets were plummeting, and investors piled into government bonds despite miniscule yields and fears about whether even the US would honour its debts? Do you remember when it seemed like those who’d put their wealth into lumps of yellow metal might actually – improbably – inherit the Earth? I do.
The Midas touch
Gold was the asset class to own in the financial crisis. While gold fell with everything else in the frenzied panic of late 2008, it soon recovered…
Do you remember the dark days of 2008 and 2009?
When famous old banks were going bust, markets were plummeting, and investors piled into government bonds despite miniscule yields and fears about whether even the US would honour its debts?
Do you remember when it seemed like those who’d put their wealth into lumps of yellow metal might actually – improbably – inherit the Earth?
The Midas touch
Gold was the asset class to own in the financial crisis.
While gold fell with everything else in the frenzied panic of late 2008, it soon recovered its momentum – unlike the UK’s FTSE 100 index, which fell around 50% between summer 2007 and the depths of Spring 2009, and is yet to get back to where it started.
Indeed, gold had a fabulous decade – it began the 21st Century priced less than $300 an ounce, but by the end of 2010 the price hit $1,000.
That’s a three-bagger return in a millennia-old asset class in just a decade!
No wonder gold’s fans sounded smug as dire headlines dominated the news.
Who wanted to own ephemeral paper assets such as shares – let alone toxic stuff such as CDOs and MBS and all the rest – when you could sleep soundly with a stash of Krugerrands under your mattress and hit other investors’ returns for six?
Perhaps the Aztecs and the Spanish Conquistadors were on to something.
Heck, ever since man was able to point a dirty finger at something shiny and grunt, every civilisation has hankered for gold.
Gold: Not so indestructible
And long after the financial panic had abated, the price still rose.
Instead of the ‘fear trade’, owning gold was now dubbed the ‘debasement trade’.
With central banks having slashed interest rates, you didn’t give up much when you held gold – which after all is no more productive than a lump of lead, compared to say a farm, a rental property or a dividend-paying company.
That seemed to make sense. Yet gold has actually come to a screeching halt long before interest rates have risen.
According to gold storage specialist BullionVault, the gold price peaked in July 2011 at around $1,837.
It now costs just $1,150 an ounce.
That’s a 37% fall in three years, and with no income or dividends to offset the pain.
So much for the ultimate store of safety!
Going cuckoo over gold again
So what next for gold, and why the potted history?
Well I’m not writing about gold because I ever believed in the more outlandish claims of the so-called Gold Bugs.
The extreme enthusiasts still sound to me more like Gollum in Lord of the Rings as they lavish praise upon their ever-so precious metal.
But I haven’t forgotten the lessons of the last decade, either.
I no longer think all money allocated to gold is wasted money, compared to if it was invested in equities or even stashed in a high-interest savings account.
And while I’m sceptical of gold’s ability to beat the stock market over the long term – or even its much-touted credentials to protect against inflation over the short to medium term – I’ve seen enough to believe it can be a good hedge in times of panic.
An asset fit for Captain Mainwaring
You see, to me the gold price seems to move with a mind of its own, apparently divorced from economic fundamentals.
This lack of correlation can be scary, but it’s also rare in today’s increasingly synchronised markets.
Gold’s very randomness is what makes it interesting as an asset class.
I’ve also come to understand that gold – derided by the great economist Keynes as a ‘barbarous relic’ – will probably always hold a fascination for the human race.
Gold is still in demand at rural weddings in India, for instance, which is understandable when you consider those people might not yet have access to bank accounts, let alone index trackers and corporate bonds.
But there are also sophisticated voices closer to home arguing for a return to the gold standard.
Indeed, the sober-minded Swiss will hold a referendum at the end of the month on whether their National Bank should hold 20% of its assets in gold.
Some pundits believe a Yes vote could single-handedly reverse the decline in the gold price, since the Swiss would have to buy heavily to replenish their vaults with bullion.
But I’m not claiming to be calling the bottom for the gold price.
I’m just pointing out that a nation that’s not famed for its craziness (cuckoo clocks notwithstanding) is still very serious about gold.
A DIY gold hoard
So how much gold exposure should a Foolish investor seek, and what’s the best way to get it?
I’m not sure. Thinking about gold as a serious asset is still a work-in-progress for me.
At least it’s now easy to invest in gold once you’ve made your mind up.
Unless you’re buying it in case civilisation breaks down – which would presumably take online stockbrokers with it – then you can get exposure via a gold ETF such ETF Securities Physical Gold, which unlike some is backed by stores of the metal.
You can also invest in gold with the Royal Mint and other gold specialists, or by buying gold coins.
Coins are illiquid and can be costly to trade and store, but some are considered legal tender and so are free of capital gains tax – helpful in a bull market for the metal.
Then there are miners such as Randgold Resources and Fresnillo.
This sector has had a torrid few years, with declines that make gold’s fall from grace look like a walk in the park.
Miners overspent in the gold boom, and many need high gold prices just to breakeven. As the price has fallen, their economics have come undone.
The flipside is they could rally fast if gold heads higher, especially if lower energy prices make mining more profitable.
Well, that’s assuming your chosen miner survives to see the gold price rise…
Investing in gold miners is the textbook definition of risky investing, and I don’t yet own any.
However I am considering taking a small punt on a gold-mining company ETF, such as iShares Gold Producers.
It has 49 holdings – mainly Canadian and US miners.
The goldilocks scenario
The best time to buy into any asset class is when people have fallen out of love with it, hated it, and then forgotten all about it.
I think we’re getting there with gold (outside of Switzerland at least!)
And the next time there’s a financial crash – whether in five years or 40 – I want a few percent of my portfolio to be in this ancient asset class.
Our very own Prime Minister David Cameron just warned us “red lights are flashing on the global economy“. Is it time to start buying?
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Owain Bennallack does not own shares in any of the companies mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.