Author Katrina Shanks, CEO Financial Advice NZ. Article originally published in stuff.co.nz.
OPINION: Last week I wrote here about how a friend of mine was considering investing in silver as part of a reassessment of her investment options.
This was prompted by many factors, including the recent share market volatility caused, in part, by China’s weaker-than-expected inflation rate, which analysts predicted would have an impact on the Asean region, and particularly countries that export heavily to China – like New Zealand.
I pointed out silver can be subject to more highs and lows because its many industrial uses can make it more sensitive to market shifts and changes in the global economy.
And that makes it not necessarily an investment for those who like certainty, especially over the short to medium term.
However, it can be considered a good hedge against inflation because it tends to increase in value when economies grow, so buying at the right time can prove to be very rewarding.
Another friend, though, reckoned gold might be a better investment.
So, let’s look at investing in gold.
There are three ways to invest in it.
You can buy gold bars and coins from any number of traders. Just make sure you do your research to make sure they have a good reputation.
With such physical investments, which in New Zealand can include some rather cool gold kiwi coins, you also need somewhere to store them. Some of the trading companies will do that for you, or you can find a secure third-party depository. All will incur ongoing rental and security costs and, depending on the arrangement, you may need your own insurance.
You can also invest in gold futures, where you invest on or against its future value, much like you might do with shares. Or you can buy shares in companies that mine for gold or invest in exchange-traded funds.
These funds are a popular way for investors to get exposure to gold without having to store them as a physical asset or make all the decisions yourself. You can keep them in your brokerage account along with other stocks and shares, and leave the fund operator to handle the details, though there are obviously brokerage fees involved in this.
One of the important things to remember about gold is that it holds its value because its industrial uses are fairly limited, unlike silver.
According to the World Gold Council, jewellery accounted for around 44 per cent of gold demand in the first half of last year, while 7.5 per cent of demand went into technology and industrial uses, such as in the manufacturing of medical devices such as stents and precision electronics such as GPS units.
When demand for these consumer goods increases, so does the price of gold, and that’s why it’s considered by some as an important diversifier in any investment portfolio.
Like silver and other precious metals, gold doesn’t offer a regular income stream in the form of interest or regular dividends. Your profit is simply the difference between what you buy and sell it for.
And like other metals and forms of investments, it is subject to highs and lows.
For example, this year gold has fluctuated between a low of US$1,811 per ounce (28 grams) in February to $2,052 in May, and last week was hovering around $1,955. Late last year it had dipped as low as $1,560.
Whatever the cost, though, its real value can be seen as a hedge against inflation.
This is because inflation quickly devalues money, and when that happens, people look for somewhere their money will at least hold its value, if not increase it, and gold does that.
During times of economic uncertainty, such as now, and unsettling events such as the war in Ukraine, more people invest in gold because of its enduring value.
And when that happens, its price increases.
Add in that it’s an asset that is not prone to big price swings or high volatility – thanks partly to its ancient and almost mythical presence – and many global analysts are right now tipping it to reach record levels next year or in 2025 and perhaps go over the $3,000 an ounce mark.
It has proven itself a reliable asset since ancient times, maintaining its value when other assets and currencies have not.
One other advantage is it can be sold easily for cash, unlike some other metals, which can take some time to sell.
Like other investments, be it metals or shares or art or cars, it’s not the price you pay, rather it’s what you buy it for and then sell it for that determines the success of your investment. So, whether you pay US$23 for an ounce of silver or nearly $2,000 for an ounce of gold is irrelevant – it’s the rise in value that’s the key.
There’s certainly something special about being able to say you own gold in some form, even more so if it’s some actual gold bullion.
I don’t hold silver or gold stocks in my investment portfolio but once again it is worth a consideration and a conversation with my adviser.
But, as always, it’s important to not get carried away. As my financial adviser would say, before jumping, do your research and understand your risk profile and how your investment portfolio is constructed to ensure it is balanced correctly.