When It Pays To Be Precious

Gold and silver are popular assets as a store of value and a hedge against inflation, so is this a good time to buy?

- David Thornton

It’s hard to escape trade-offs in the world of investment finance. If you want growth, you invest in equities but cop high volatility. If you want defensive assets you can invest in bonds that pay rock-bottom yields.

But what if you were told that there’s an asset class that diversifies, is resistant to volatility, grows when the markets go down and also when they go up?

Cue gold and silver.

Golden touch

Gold lives up to its position on the top pedestal in this asset class. We all recognise gold as the metal that adorns fingers, wrists and necks. It also has some industrial applications in electronics and dentistry.

For investment purposes it is mainly seen as a monetary reserve for central banks, as a stable store of value. What is less clear is where this value comes from.

In one camp sit those who say gold has intrinsic value because it can’t be replicated, has industrial applications and is scarce.

In the other camp are those who say it has no intrinsic value – with the exception of a few minor industrial applications, you can’t do anything with it. Its value comes simply from its allure.

Indeed, most of the demand for gold comes from the investment world.

“If you look at the demand for gold, roughly 90% of it comes from what we would call pure investment demand – gold ETFs, physical gold, reserve bank purchases,” says Jordan Eliseo, manager of listed products and investment research at the Perth Mint. “Very little comes from industrial demand.”

Gold is an all-weather asset, performing both growth and defensive roles through the business cycle.