By: Chantal Marx
The gold price recently reached another all-time high, and over the last few days has sold off substantially. Both the move above $5 000 as well as recent volatility has prompted investors to reassess their current exposure. Those already invested are weighing whether to sell or hold, while those without exposure are questioning if it's worth starting a position now.
Gold as a "safe-haven asset"
Gold, along with cash and certain other instruments, is generally regarded as a safe-haven asset. Safe-haven assets tend to provide relief to a portfolio during times of market stress. Risky assets like (most) equities are the growth engine of a portfolio - which add the bulk of returns during the good times, but during times of crisis those assets can suffer severe drawdowns, and more reliance will be placed on other defensive assets to cushion overall portfolio returns. Risky assets are needed to generate growth over the long term, but at the same time, limiting drawdowns limits the extent and duration of recovery needed to return to a pre-crisis portfolio value.
When there is a lot of stress or uncertainty in markets, gold generally appreciates in value due to its safe-haven appeal. In the recent bull run, this demand has certainly offered support against a backdrop of major geopolitical risks and capital market volatility.
Gold is also widely regarded as an inflation "hedge", meaning that its value tends to rise with inflation - thereby protecting its holders from an erosion in purchase power when inflation is high.
Why the rally?
There are several reasons why we have experienced another gold bull market:
Why the sell-off these last few days?
Is it worth holding on to your gold?
An argument can be made that most of the drivers of the rally could still support the gold price this year. Considering ongoing global conflicts and other political and geopolitical dynamics, the safe-haven demand for gold could see demand from asset managers, retail investors and speculators remain supported. The expectation is that central banks around the globe will continue to purchase gold - although it may be more opportunistic and at a slower pace due to the high current price for the metal.
The possibility of continued support from a weakening dollar remains in the balance.
There are some reasons to be cautious as well. Cost-of-living pressures and the very high price of gold (and commensurate price hikes) could dampen jewellery demand and indeed retail investor demand for gold ETFs globally. There may also be some tactical changes coming through from asset managers as the gold price remains elevated.
From a portfolio management perspective, it is prudent to periodically reduce exposure when position sizing becomes very large, but to equally not panic during periods of volatility or weakness.
What about investors that don't have exposure to gold?
There is an all-too-common temptation to try and time financial markets, and by timing, we mean in a binary fashion i.e., try and invest all your money in equities on the way up, and all your money in safe-haven assets on the way down. While the thinking is sensible, it is predicated on being able to identify the "top" and "bottom" of a market cycle… something that is very difficult to accomplish.
A more measured approach is to still consider adding gold to your portfolio during periods of weakness to increase your exposure over time. Typically, gold, or similar safe-haven assets (like cash), will make up 5% to 10% of your investment portfolio.
How to gain exposure to gold
There are several ways to gain exposure to gold besides physically purchasing bars and coins and storing it yourself:
