Ray Dalio, the American financier, has often mentioned holding gold as part of a diversified portfolio. This is a sentiment that the founder of Bridgewater Associates (the hedge fund behemoth) repeated again during a recent interview with CNBC.
The case for gold
I’ve always been keen on allocating a small portion of my own portfolio to gold for two reasons.
First, the precious metal is considered a hedge against inflation. This is because inflation decreases the purchasing power of a currency, so you need more currency to buy the same amount of gold.
Second, it can provide protection against a sudden market downturn. The price of gold is largely seen as negatively correlated with stock prices, as when the market collapses, investors flock to the asset as a safe haven.
However, gold is by no means perfect. Central banks can raise interest rates in response to inflation. In this case, an asset without any earnings such as gold may not be as good as investments that pay earnings, such as high-dividend shares.
Options for investing
There are a few options available for investing in gold. For example, it’s possible to buy physical gold from the Royal Mint or other precious metal brokers, but that opens up questions about storage, which can be costly.
In my opinion, one of the easiest ways for me to buy is through a gold ETC (exchange traded commodity). This is a fund tracking the spot price of gold, but it trades like a stock and can be bought and sold through most online brokers.
There are lots of gold ETCs available, but for my portfolio, I choose to use two factors. First the size of the fund and second, the expense ratio.
I prefer iShares Physical Gold ETC (LSE:SGLN), which tracks the gold spot price and scores well against my measures. It’s large in size (over £9bn) and has a low ongoing charge of 0.15%. I also draw comfort knowing that the fund has been going for over 10 years now.
Performance and opinion
The performance has been mixed. The fund is down around 6% year-to-date and 2% year-on-year. Over a five-year period, the return has been much better at over 50%.
Looking ahead, it’s difficult for me to see where the share price could go. The value of gold and therefore of this ETC will be largely determined by the macro environment, which at present is so uncertain.
Despite this, I still consider this ETC as a sensible component for my portfolio. The hope is that iShares Physical Gold ETC will act as a kind of insurance policy against a stock market crash or inflation.
Therefore I’m comfortable following the advice of Ray Dalio and I’ve allocated a small portion of my holdings to it.
