Gold; An investment which has stood the test of time, and continues to perk the interest of many, not only as an investment, but as a barometer of global economic confidence.

Although an investment in gold does not fit my investment principals, namely to invest in income generating assets, through deeper consideration, and taking a view that past financial crises are likely to repeat, I have come to see an investment in gold as not so much of an asset, but more as an insurance policy. I have also justified the lack of income generation (no dividends / interest) as a cost of the investment and have considered this cost an insurance premium.

Several years ago, the concept of insurance within a portfolio did not mean much to me. This lack of consideration was, I believe, due to two factors. The first being that my investment portfolio was relatively small, and therefore the cost of insurance did not really make economic sense. The second was that due to the small size of my portfolio and young age, should a large-scale event occur, I would be able to rebuild this wealth.

However, as my portfolio has grown, and income from the portfolio has increased, the concept of insurance has become more relevant. Also, now that I have a larger income base to support the cost of insurance, and I have more financial assets to lose, the concept of insurance makes more economic sense.

To provide some background and to add some context to my thoughts on adding bullion to my portfolio, I have no debt and am currently 100% invested in shares and cash with no real assets such as property or land. Whilst this portfolio is sufficiently diversified across individual stocks and cash, given the convergence of sector and asset correlation over recent years, should a significant shock hit the market, all these assets could suffer a downside shock. In short, my investment portfolio, and financial capital, is at the whim of events both good and bad in the financial markets.

Whilst the last several years have provided an extremely supportive environment with some very good market returns, I am not naïve enough to think that with global stock indices near all-time highs (look at the NZX50 and Nasdaq over the last ten years), household debt higher than 2008, property prices at record levels (see Reserve Bank of New Zealand charts), and NZ GDP growth beginning to trend lower, the music may start to slow.

Although I have my concerns that another financial meltdown may soon be upon us, simply pulling up stumps, trading out and heading for the hills is not of interest for me. Instead, I have sought to further diversify my portfolio and look for ways to provide some insulation from a collapse in the share market, or bank failure.

After some consideration, I decided on gold bullion as the insulation. For the more experienced amongst you, you will of course mention the storage costs, nil income value, and fees on purchase that would make this an unwise investment and I would not disagree. However, there are counter arguments that gold is a store of value, a highly liquid asset, a hedge against inflation, and most importantly for me, a safe haven in uncertain times (check the price of gold during the 2008-09 financial crisis).

Since I have made this purchase, and with the bullion now sitting safely in my own lock box at an undisclosed location, I can take some comfort in that no matter what happens, I will have a physical asset that has proven its value throughout history.

In terms of the investment in this asset, I have by no means invested a significant amount of my portfolio, but just enough to give me a good night’s sleep knowing that should the world turn on itself, or a material shake out occur, I have increased my chances of retaining value.

A further point to note is that the value of gold tends to be negatively correlated with the USD. As I purchased my bullion in late 2017, this negative correlation with the USD has been an important point for me. With my portfolio based in NZD, which has fallen against the USD over the past 12 months, losses due to the fall in the gold price have been offset by an increase in the USD relative to NZD. Positively, this has generated a small paper profit for this position.

This will not speak to everyone, but for some of those who are like myself, possibly involved in finance and potentially a little too close to the coal face, and are measured in their approach to investment risk, an investment in bullion may be something for you to consider. In other words, buy gold and get a good night’s sleep…