Before I really started to learn about investing my impression was very much that buying gold was reserved for crazy Americans who buried it in their underground doomsday shelters along with with guns, vac packed food and tin foil hats.
So what’s changed?
Two things: my understanding of how the economy works and the global pandemic.
Why Do People Invest In Gold?
There are a number of classic reasons investors hold gold as part of their portfolio:
- To hedge against inflation – historically the price of gold often rises with the cost of living protecting your spending power vs holding cash or bonds.
- To store value – over exposure to any asset can be dangerous so gold is often used as a diversified way to store wealth (classically it’s known as a ‘safe haven’)
- To increase wealth – much like any asset investors often buy gold because, for whatever reasons, their analysis shows that the value will increase over their desired time horizon.
- To diversify their portfolio – historically gold has a negative correlation to the stock market so when the market dips the gold prices rises.
- To protect against complete economic collapse – if the economy in any country completely collapses then it currency is completely devalued on a global scale. Gold can be traded for any currency so wealth held in gold is considered somewhat protected (this does actually happen.. just look at hyper inflation in Argentina and how the financial crash affected Iceland in 2008).
Why Don’t People Invest In Gold?
It feels like there’s a civil war of types going on among investors where you’re either pro holding gold or very much against it.
Common arguments against investing in gold include:
- Gold doesn’t generate revenue, dividends or interest – it’s a zero cash flow asset.
- Gold is a bad long term investment – it’s inflation adjusted returned over the last 40 years (since 1978) are just 45%, as a comparison the S&P 500 went up 630% over the same time period when adjusted for inflation.
- Gold has hidden costs – if you hold physical gold you have to pay for shipping and storage or risk storing the gold at home which exposes you to a total loss via theft, fire or natural disaster.
- Profit depends on timing the market – because gold doesn’t generate dividends or interest profiting from it as an investment means buying low and selling high (timing the market) which is complex even for the most seasoned precious metal experts.
Why Do I Invest In Gold?
Honestly both sides have valid points when it comes to investing in gold and for a long time it wasn’t an asset I was interesting in holding simply because I didn’t believe it offered the best return on my money long term.
Enter Ray Dalio and the Global Pandemic.
NB: If you don’t know who Ray Dalio is I suggest you check out his profile on Wikipedia… he’s kind of a big deal.
Ray’s argument, put forward with astounding clarity in his online series and book The Changing World Order, suggests that we are towards the end of the debt cycle in the Western world and as a result of increasing and unserviceable debt throughout society the currencies our economy are built on are more fragile than ever.
Don’t Be Lazy: you might not want to read The Changing World Order because it’s dense and complex but skipping it might well be the biggest financial mistake you’ll ever make.
When you read and understand Ray’s argument and you couple that with the fact that the global pandemic has lead to an insane amount of money printing you can’t help but feel that currency issues are more possible than ever.
Never, in modern times, has hyperinflation or hyperdeflation looked more possible than it does right now.
That doesn’t mean it will definitely happen… it just means that the chances of it happening are increased and/or accelerated and therefore strategy should be adjusted accordingly.
I hold gold because I want to…
- Protect against an increased risk of currency instability.
- Profit from a potential price rise when inflation or deflation moves the heard into gold and drives the price up.
- Store my wealth in an asset that isn’t closely tied to any government or political policy maker.
I understand that by doing so I face the opportunity cost of not deploying the allocated capital into a dividend or interest paying asset and that the price could decrease and I could lose money on the investment.
How To Buy Gold
You’ve got two real options if you want to own gold as part of your investment portfolio.
- You buy the physical gold bullion.
- You buy a gold price linked financial product.
I have no desire to hold physical gold, I don’t want to have to know what form I should be buying, how much it should cost, pay to ship it, pay to store it or risk storing it in my house (under the bed perhaps?).
Option 2 is my preferred route and my entire gold holding is done via the iShares Physical Gold ETC (SGLN).
What is iShares Physical Gold ETC (SGLN)?
SGLN is an exchange traded commodities fund which tracks the price of gold. It’s traded on the stock exchange, much like a regular stock would be, but the price of the fund moves up and down with the price of gold.
It’s a very easy, low fee way, to gain exposure to gold without having to mess about with the physical asset… and allows me to avoid carting it out and burying it in my doomsday bunker (gold is pretty heavy you know).
How Do I Buy SGLN?
SGLN is available at any decent online brokerage – my personal favourite being Interactive Investor (great because you pay them a flat fee and not a percentage of your total investments).
Once you’ve done that and logged in hit the Trading drop down menu and select ‘trade now’.
Making sure investment type is set to ‘UK Shares & ETFs’ type ‘SGLN” into the ‘Shares/ETF name field’.
Select ‘Buy’, trade by ‘Cash’ and enter the amount you want to invest into the field provide
Hit ‘Preview Order’ and if you’re happy with the details confirm the transaction.
As soon as the purchase completes you’ll find your investment listed under ‘Portfolio’ and then ‘Investments’.
All of the above can be done via the Interactive Investor app on your mobile phone however if using Interactive Investor for the firs time I’d advise you use your desktop first to get to grips with the interface.
Disclaimer: as with all investments the price of gold can go up or down meaning it’s possible you could lose money. This page should not be considered financial advice and is for entertainment purposes only.