When it comes to investing, diversification is key. This means spreading your investments across different types of assets, such as stocks, bonds, and cash, in order to minimize risk and maximize returns. One asset class that is often overlooked, but should be considered, is gold. Specifically, gold bullion and gold equities. In this essay, the argument will be made that having gold bullion and gold equities in a diversified portfolio is crucial for long-term financial stability and success.
First, let’s define what we mean by gold bullion and gold equities. Gold bullion refers to physical gold in the form of coins or bars. It is a tangible asset that can be held in your hand and stored in a safe or safe deposit box. Gold equities, on the other hand, refer to stocks of companies that mine or deal in gold. These include companies such as Barrick Gold, Newmont, Newcrest and Evolution Mining.
One of the main reasons to include gold bullion and gold equities in a diversified portfolio is for protection against inflation and market fluctuations. Inflation is the rate at which the general level of prices for goods and services is rising and subsequently purchasing power is falling. Historically, gold has been a hedge against inflation, meaning that its value tends to rise when inflation is high. This is because gold is a finite resource and its supply cannot be increased to meet demand, unlike paper money which can be printed in unlimited quantities. As inflation rises and the value of paper money decreases, gold becomes more valuable in comparison. By having gold bullion and gold equities in a portfolio, investors can protect their purchasing power and their wealth from being eroded by inflation.
Another benefit of having gold bullion and gold equities in a diversified portfolio is that they can provide a source of stability during times of economic and geopolitical uncertainty, as gold is accepted worldwide and not tied to a specific country or region, making it less susceptible to the problems of a specific economy. Meaning it can provide a hedge against a weakening or depreciating currency.
Gold has a long history of being a store of value and has been used as a form of currency for centuries. Gold has long been considered a safe haven asset, meaning that it tends to hold its value or even increase in value during times of market volatility or economic downturns. This is because investors tend to flock to gold as a store of value during times of uncertainty, as it tends to hold its value better than other investments like stocks and bonds. This therefore drives up demand and subsequently increases its value.
In addition to providing protection against inflation and stability during times of uncertainty, gold bullion and gold equities can also provide a source of diversification in a portfolio. Diversification is important because it helps to minimize risk by spreading investments across different asset classes. By including gold bullion and gold equities in a portfolio, investors can diversify their investments and reduce their overall risk. One of the main reasons for this is that gold has a low correlation with other asset classes, making it a valuable diversification tool for an investment portfolio. This history of stability and reliability has made gold a popular choice for investors looking to preserve their wealth over the long term.
When it comes to investing in gold, there are two main options: gold bullion and gold equities. Gold bullion refers to physical gold, such as coins or bars, that can be bought and stored in a safe or deposit box. Gold equities, on the other hand, refer to investments in companies that mine or explore for gold. These investments can include stocks, exchange-traded funds (ETFs), and mutual funds.
Gold bullion is often considered the safest option for investing in gold, as it is a physical asset that can be held in your own possession, while still being easily transportable and liquid. It is also less susceptible to market fluctuations and can act as a hedge against inflation. When inflation rates rise, the value of the dollar tends to decrease, which can make the cost of goods and services more expensive. Gold, on the other hand, tends to increase in value during times of inflation, making it a valuable asset to hold.
Another key characteristic of gold is that it is a relatively scarce resource. Unlike stocks and bonds, which can be issued in unlimited quantities, the amount of gold in the world is limited. This scarcity helps to maintain the value of gold over time, as demand for the metal typically exceeds supply.
Another benefit of investing in gold bullion is that it is a liquid asset. This means that it can be easily bought and sold, making it a convenient option for those looking to access their money quickly. Additionally, gold bullion can be stored in a safe or deposit box, giving investors the peace of mind that their assets are secure.
Charles de Gaulle famously said in February 1965 at the Palais Elysée:
“No currency can compare, either on a direct or an indirect relationship, real or imagined, with gold”.
He then continued his now famous DeGaulle’s ‘Criterion’ speech with:
“The fact that many countries accept as a principle, dollars being as good as gold for the payment of differences existing to their advantage in the American balance of Trade – this very fact leads Americans to get into debt for free at the expense of other countries. Because what the USA owes them, it is paid, at least in part with dollars, which only they are allowed to emit.
“Considering the serious consequences a crisis world would have in such a domain we think that measures must be taken to avoid it. We consider necessary that international trade be established, as it was the case before the great misfortunes of the world, on an indisputable monetary base, and one which does not bear the mark of any particular country.”
“In truth no-one sees how one could really have any standard criterion other than GOLD!!”
However, it’s important to note that while gold can be a great addition to a diversified portfolio and has many benefits, gold bullion is not without its risks. Following Nixon’s decision to end the US dollar’s ties to gold during his presidency the price of gold has become more volatile with geopolitical and economic events such as the war in Ukraine, currency valuations and bond yields having a more significant impact on its market value. There are also added risks and costs of storage and insurance. If you choose this option, it is important to invest in reputable dealers and to store the gold in a secure location. However, gold storage is not as expensive as one would have anticipated with various vaults offering storage solutions for as low as approximately AUD $250 per year. Another drawback with Gold is that it does not generate any income, unlike stocks and bonds, which can provide dividends or interest payments. Therefore, some investors may prefer owning gold shares as an alternative, as it still exposes their portfolio to the precious metal, however, has the added benefit of providing a regular dividend payment.
Despite these risks, gold bullion can be a valuable addition to an investment portfolio. The key is to approach gold investments with a long-term perspective and to hold a diversified portfolio that includes a mix of different asset classes.
Gold equities, on the other hand, offer the potential for higher returns and exposure to the gold mining industry. Investing in gold equities can be a good way to gain exposure to gold while also having the opportunity to earn higher returns. The value of gold equities is closely tied to the performance of the companies that mine or explore for gold. When the price of gold rises, the value of these companies also tends to rise, which can lead to higher returns for investors.
When it comes to investing in gold equities, it is important to consider the company’s management team, financials, and growth prospects. It is also a good idea to track the stock price over a lengthy period, as this can give an indication of the company’s performance and potential for future growth.
Another important factor to consider when investing in gold equities is the mining company’s operating costs. The mining industry is a capital-intensive business, and companies that have lower operating costs tend to be more profitable than those with higher operating costs. Investors should also consider the company’s liquidity and debt levels, as these can affect its ability to weather economic downturns.
Including gold bullion and gold equities in a diversified portfolio can provide protection against inflation, stability during times of economic uncertainty, and diversification. While the value of gold may fluctuate, it’s a valuable addition to any portfolio, and it’s worth considering as a long-term investment. Investing in gold bullion and gold equities can be a valuable addition to a diversified investment portfolio. They provide unique benefits that can help to protect and grow an investor’s wealth over time. By including gold in a portfolio, investors can potentially offset the risks of other asset classes and potentially earn higher returns. As always, investors should consult with a financial advisor, do their own research, and carefully consider their own investment goals and risk tolerance before making any investment decisions.
In 2022 Barry and Jill were invited to visit Evolution Mining’s Cowal mine, which allowed them to see firsthand the process which is undertaken in the mining of gold ore. Photos of the trip are interspersed throughout this essay.
The choice was made to source this essay using ChatGPT, with Jill Nes collating and editing the resultant text.
This publication has been prepared by BMF Asset Management Pty Limited (ACN 092 277 971, AFSL 224035), to provide you with general information only. In preparing it, we did not take into account the investment objectives, financial situation, or particular needs of any person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information without consulting us or your financial adviser.