Gold has consistently been described as “the most necessary constituent of any investment portfolio” – do you want to follow that blindly or understand why?
For as long as I care to remember, gold, whether through physical investment or via established miners such as Newcrest Mining Limited (ASX: NCM), has been recommended by more or less, everyone from institutional and professional investors, through to the next-door neighbours and for good reason, as we shall see in detail.
Gold – “The Safe Investment!”
When the Global Financial Crisis of 07-09 was occurring, gold had an outstanding performance. While the S&P500 dropped from 1,576 on September 30, 2007, down to 734 on February 1st of 2009 (a drop of 46.6%), physical gold went from $859 in October of 07, up to $1,067 in February of 2009 (a gain of 24.2%).
This cemented Gold the reputation it continues to hold, even now. Now, while many investors like to think that the market is that simple, reality is, it’s just a bit trickier than that!!!
I will show you in a very straightforward way, exactly how that is the case. In the time since February 2009, the S&P500 has risen to record highs currently trading at 2,089, a gain of 32.6% from the pre-GFC levels. Meanwhile, gold is trading at 1,077, a gain of just 25.4%! That means that even since the start of the GFC, the S&P500 Index has outperformed gold by over 1% p.a. So if you have been listening to what some say – you know – that gold is the only way to stay safe, you need to remember the important facts!
Education is not expensive, but ignorance is!
What we’ll do now is take a closer look at the most commonly traded ASX stock within the gold space, Newcrest Mining Limited (ASX: NCM). Newcrest Mining gave many investors the exposure they were after within the gold space without having to be a physical gold holder. Newcrest Mining was very much rewarded for its exposure to gold during the GFC. Up from $22 to $42 in the GFC period, many investors were sitting pretty.
Unfortunately, not only did the gold demand decrease – perhaps due to gold investors reaching a “saturation level” of how much they were willing to hold, but we then saw a catastrophe within the internal structure of Newcrest Mining (ASX: NCM). Previously seen as one of the safest blue-chip stocks on the ASX, the foundation of NCM was rocked with allegations of insider trading. Since this time, we have seen NCM stabilise at the $10-$15 range, quite a large range which is common due to gold traders. Palpable however that it has suffered significantly, still operating below pre-GFC prices.
So why then, is this reputation out there?
Well for starters, most of those investing have not established their risk profile and aren’t prepared for sudden volatility in the market. More importantly, what comes with this in the form of a devastation of their accounts during the GFC, have gotten out of the markets which punished them, typically at or near the lows!
Of course it is very easy for us on the inside, to see exactly why that would have been the worst thing to do, after-all, the reality is no investment strategy would recommend selling at the lows.
Make sure you understand how to take advantage of these situations, after-all, a 1.2% gain in your portfolio, since the GFC, isn’t of interest to most people, and they certainly wouldn’t be happy with their hard-earned money generating that negligible sort of profit since the GFC which is absolutely fair enough considering that you could have generated more profit sitting in the banks with bank savings account risk levels.
So should you invest in gold?
Well let’s take a look at what those with the most know-how in the industry have to say about that…
The World Gold Council, for those of you who aren’t aware, is the market development organisation for the gold industry. They work within the investment, jewellery and technology sectors as well as engaging in government affairs, its purpose is to provide industry leadership whilst stimulating and sustaining demand for gold.
In their latest quarterly report, they provided a recommendation that during strong US dollar conditions, such as we are undoubtedly seeing now, that a typical portfolio should hold approximately 3.8% gold weighting.
This is the recommendation of a group created to stimulate gold demand!
Based on this it is pretty safe to say that if you hold more than this in gold, it might be time to take a look at your strategy. Or maybe you are a trader in which case you should have done fantastically during the GFC period, capitalising on both the gold rise and the stock market rise following would see you enjoying some fantastic returns.
However, even those that are trading tend to get a little bit greedy or emotionally committed to their portfolio. In doing so, they don’t implement their strategy correctly and end up holding on too long and are generally back to break-even or worse.