Gold price hit record high recently as investors rush to traditional “safe haven” to park their money as the global Covid-19 crisis deepens. Gold has always been a faithful friend to longterm investors, outperforming all of the major asset classes including global equities, US equities, US bonds and commodities over the past five, 20 and 50 years.
As a source of long-term returns, gold as an investment is often regarded as one of the more disposable parts of a portfolio. Perhaps, it is time to rethink gold from a long term perspective, not just for crises. As the world’s stock of gold is not going to increase much, gold has been a reliable long-term store of value, providing defence against inflation — unlike a banknote. In addition, among all the major asset classes, only gold and gold equities have typically delivered strong returns during 21st century stock-market downturns. Government bonds kept their noses above water in the last two sell-offs. But with yields so low, it is hard to see these traditional bulwarks against declining stock markets generating sufficient returns to offset poor equity performance.
Gold good for diversification
Of course, a long-term investor would expect equities to catch up in bull markets. The point is that gold and gold stocks have tended to maintain a low correlation to general equities and other risk assets through market cycles. We believe that makes them good portfolio diversifiers. Gold has another useful quality in a crisis: it usually remains liquid. In value terms, the gold market trades approximately the same per day as the S&P500 Index. Consequently, in turbulent times, investors needing immediate-term funding often turn to it when other markets are seizing up. Simply put, there’s a fair chance an investor will be able to liquidate their gold holdings whenever they need to access cash.
Gold can be a useful long-term allocation. But we think there is one reason in particular to consider making that allocation now. In our view, persistently low interest rates set the stage for a multi-year tailwind for gold, because they are likely to continue fueling robust demand for the metal from central banks and investors. That’s partly because gold’s relative appeal increases as the yields on other assets decline.
Gold equities are also a useful way to get exposure to gold, whether on a standalone basis or as part of a gold allocation. They offer many of the same qualities as gold, including having a low correlation with general equities and being “counter-cyclical in nature, and they can bring other complementary features to a portfolio.
While physical gold offers no income, gold equities increasingly have done, in the form of dividends. Dividends per share of the top five gold companies have doubled since 2015 (see chart). They have risen due to a strategic shift in the gold industry away from ‘more mines, more ounces’ and towards resilience, less debt and shareholder returns.
Stocks’ leverage to the gold price can be useful
Gold equities are leveraged to the gold price. This means they typically outperform gold in a rising gold market, and underperform in a falling gold market. At the portfolio level, we think that gives investors some useful options:
• Use gold equities to achieve the same exposure to gold with less capital.
• Enhance a physical gold allocation’s counter-cyclical properties by adding gold equities.
• Adjust the mix of gold and gold equities within a strategic gold allocation to make tactical tilts.
Gold is an inert metal (hence its usefulness in medicine and dentistry) and one ingot is much like another. Gold companies, on the other hand, vary. The industry trend is towards resilience, responsible spending and shareholder returns, but individual gold companies are taking different approaches — giving active investors the chance to focus on those they believe will outperform in different market conditions.
George Cheveley is the Portfolio Manager of Ninety One
