Johannesburg – Gold is a good example of an unproductive
asset class that produces no income and whose yield is merely dependent on
price movements and the moods of investors.
The only way to make money from an investment in gold is to
sell it to someone who is prepared to pay more for it than you did.
This means that an investment in gold is far riskier than
one in gold shares, says Takura Mahwehwe, portfolio construction analyst at
Cannon Asset Management.
Nevertheless, in recent years many have apparently
been prepared to pay sky high prices for the yellow metal.
The sharp increases in the gold price over the past 10 years
– from $300 a fine ounce to the current $1 600-odd a fine ounce – make the gold
bulls appear to be exceptionally smart investors, although they are only
gambling on other investors’ view that gold will continue to improve.
Mahwehwe says this means gold is a speculative
investment that is even more volatile than an investment in shares. In
addition, gold’s usefulness is limited compared to that of other resources.
“Once it has been extracted from the ground, it waits above ground to be sold.”
Gold sales are driven by two main factors: its status as a
safe haven in times of uncertainty and as an asset that will retain its value
in periods of high inflation.
At the moment there is no lack of news regarding
uncertainty in the global economy, and there are fears that the US fiscal
expansion programme will be inflationary.
These fears, according to the GFMS analysis group, could
contribute to the gold price again reaching a high of $1 900 before the end of
the year after a brief slump to below $1 550/oz.
Philip Klapwijk, head of analytical services at GFMS,
reckons a rise to $2 000/oz before even year-end is a strong
possibility, but is more likely in the first half of next year.
Klapwijk says the rise will be driven by renewed “acute
fears” about European countries’ sovereign debt and further (inflationary)
fiscal measures in the US as the economy starts to wobble.
Low or negative
interest rates and shaky equity markets will neutralise the cost of an
investment in gold (as a safe haven or insurance), he says.
Mahwehwe says that it’s precisely the cost of investing in
gold that means it's an investment that yields a negative return and, owing to
its speculative nature, delivers a much poorer return than other asset classes
over long periods.
In fact, the gold price trended downwards for a period of 20
years from the late 1970s to 2001.
There is the further risk that the gold price could rapidly
collapse should investors’ views on gold change.
Mahwehwe says that, unlike other investments, no appropriate
value can be determined for gold.
“A fair value for assets is largely determined by the income
or returns they deliver and gold does not offer either of these. It's therefore
difficult to determine whether an investment at a particular price is a good
“Not even the demand for gold can be used to arrive at a
value because its industrial use is limited and it is subject to the whims of
investors,” he says.
Mahwehwe says an alternative to an investment in gold is one
in gold shares, whose value can be determined. A number of factors have caused
returns on South African gold shares over the past five years to underperform
the rise in the gold price.
The advantage of an investment in gold shares is
however that that the yield is modest and dividends in time will add more to
the total yield than an increase in the capital.
One ounce is always one ounce – Buffett
American investment guru Warren Buffett reckons gold falls
in the investment category of assets “that will never show a return”.
In a February letter to Berkshire Hathaway shareholders this
year he said that gold is bought by someone who hopes that someone else – who
is also aware that the asset will never produce anything – will in future pay
more for it.
This type of investment requires a growing pool of buyers
who believe that the pool will continue to grow because others will desire it
more in future.
He says gold is currently popular among people who are
afraid of every other asset class, but it has two big shortcomings. It has
little use or productive power.
Admittedly, gold has some use as decoration or
in industrial applications, but both are limited and will not necessarily be
able to absorb additional production.
As a result, if you own one ounce of gold for a long time
you will ultimately still own one ounce of gold.
Most buyers of gold are motivated by a belief that the
number of fearful people will continue to grow. This has indeed been so in the
past decade and the rising price has attracted more buyers.
In February the value of the world’s 170 tonnes of gold (at
$1 750/oz) was $9 600bn.
The value of the gold being produced each
year is $160bn and buyers – jewellers, industrialists, scared investors and
speculators – will have to continue to absorb the additional production just to
maintain the balance in the market at current prices, says Buffett.
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