Should you invest in gold during stock market turmoil?
When the markets opened on Friday after the EU Referendum Leave result was announced, the FTSE 100 index of the largest companies listed on the London Stock Exchange plunged more than 8% at one point before recovering some ground to close 3.2% lower. This was a huge fall for one day.
On Monday the FTSE 100 index continued to fall, closing down 2.6% at 5982.2. But on Tuesday it swung back up by 2.6%.
Today, Rebecca O'Keeffe, head of investment at stockbroker Interactive Investor says: “Investors, who are still trying to work out whether current market levels pose and opportunity or a threat, are coming down firmly on the side of opportunity with equities across the UK and Europe up strongly for a second day. With global central banks all trying to reassure markets, prices are stabilising and volatility is falling. However, it is still very early in the process and significant political and market risks remain, so we may start to see some investors start to sell the rally, which could see markets pare back some of the gains.”
These market swings are what we call ‘volatile markets’. And the market turmoil of the past week has triggered a "flight to safety", as investor look for safe haven investments. A traditional ‘safe haven’ is gold and so it’s no surprise that the gold price has risen steeply since Friday.
Why do worried investors turn to gold?
Gold is one of the few safe haven investments whose value tends to be uncorrelated with other assets. Since the end of April gold demand has spiked, due to growing concerns over global growth, as well as the uncertainty a Brexit vote would bring for Britain's economy.
The strongest argument for holding gold is its insurance properties. A gold bar is often reached for in periods of political and economic uncertainty. And there is evidence that the price of gold is correlated with market uncertainty, it behaves differently to other asset classes and tends to rally while other assets are falling. For this reason some investors always hold a little bit of gold in their portfolios.
On Friday, Adrian Ash, head of research at BullionVault.com, said: “This is just the kind of crisis which gold helps savers and investors insure against.
“Gold offers certainty and security as stock markets and currencies sink, just as it did during the 2008 meltdown. The difference is that this shock was clearly signposted, and many private investors didn't wait for today's result to get prepared.”
However, gold is not a suitable investment for everyone. And before buying you should examine the arguments against holding it.
Many independent financial advisers tell their clients not to hold gold because they don't consider gold to be an 'investment' at all.
When investors buy shares in companies traded on the stock market they often look at the investment’s income generating ability. They consider the value that they are prepared to place on future dividends that they expect to be paid out to shareholders by the company. However, gold produces no income at all – it’s value is entirely subjective.
My favourite quote on this is from Alan Dick, a certified and chartered financial planner at FortyTwo Wealth Management. He once told me: "Investing' in gold is taking a punt on whether a greater fool will buy it off you for a higher price sometime soon. One can put together all sorts of arguments about supply and demand to justify the likelihood of such a greater fool materialising, but that doesn't change the fact that buying gold is simply speculating on a price movement.”
But, as a private investor, the odds are against you getting that speculation right. If big institutions and hedge funds are dumping gold then you can't compete.
Have you thought about when you’re going to sell your gold, and at what price? If you can’t answer these questions then you’re probably making an emotional rather than a rational investment decision. You’re investing in gold because everyone else is. And you could get badly burned.
If you're going to "speculate" in gold, then buy an exchange traded commodity (ETC), as this will enable you to get in and out quickly at low cost. ETCs are traded on the London Stock Exchange and you can buy them through most investment platforms.
The one that I prefer is the Source Physical Gold P-ETC, identified via its code SGLD.
Think of it like buying gold bars without the hassle and expense of having to store your gold somewhere. The ETC provides investors with the performance of the gold spot price through certificates backed by gold bullion, held in JPMorgan Chase Bank’s London vaults.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A sophisticated absolute return fund that seeks to make money for its investors regardless of how global markets are performing. To that end, they invest in shares, bonds, currencies and commodities using a raft of investment techniques such as gearing, short selling, derivatives, futures, options and interest rate swaps. Most are based “offshore” and are not regulated by the financial authorities. Although ordinary investors can gain exposure to hedge funds through certain types of investment funds, direct investment is for the wealthy as most funds require potential investors to have liquid assets greater than £150,000m.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).