The recent resurgence in the price of the yellow metal demonstrates exactly why it’s always worth having exposure to it – put simply, it provides a great insurance policy to the bouts of equity market weakness that afflict all portfolios or, as Clive Hale at fund research outfit FundCalibre puts it on page 48 “against central bank stupidity”.
Yet, despite recent experience this view is far from universally accepted. An asset that generates no returns has no place in a portfolio, argue those who view gold as a barbarous relic; the lust for gold, they suggest, is simply a residual – and therefore irrational - attachment to precious metals left over from a time when it was the only means of exchange, and unnecessary in our sophisticated modern economy.
Of course, the complexity of the global economy is precisely why so many are still drawn to the tangibility of gold, just as they are to bricks and mortar. And it would be equally irrational to ignore the complicated maths of modern portfolio theory that proves the benefits of gold ownership. One simple concept to grasp is that gold is inversely correlated to real interest rates – and with these set to stay low gold should prosper. You certainly don’t have to be a credulous goldbug to accept this.
Nevertheless the debate over gold’s role in investment is likely to continue to polarise opinion. Perhaps those that find direct gold investment unpalatable should instead look to the middle ground of gold mining equities to gain exposure. Like gold itself, gold miners have enjoyed good gains so far this year even when other areas of the commodity complex have suffered. Having lost nearly twice as much as gold itself from its 2011 peak, down around 80 per cent, the FTSE Gold Miners global index has jumped 56 per cent in 2016, nearly three times the rate of recovery in the gold price.
Operational gearing explains this disparity – with high fixed costs, the falling gold price took a huge bite out of miners' earnings on the way down. Of course the opposite is true, too – and if, as many suggest, gold is likely to make further headway this year, that will provide a huge windfall to producers who also worked hard to reduce production costs achieved when the only way for the gold price looked to be down. So if you believe the gold price has further to recover, the geared play of gold miners could prove a better bet.
