Tony Coleman, managing director and founder of New Zealand Gold Merchants Ltd, offers his opinion on the best way to balance an investment portfolio.
One of the most important words in anyone's financial vocabulary is: diversification, otherwise known as protecting oneself from the cold winds that can blow through the financial markets.
New Zealand, at the moment, is heavily exposed to what seem to be two burst-able bubbles – the share market and the property market, both of which most experts agree are massively overpriced, even though recent government measures to cool the property market have been applied.
So diversification is a must for any balanced portfolio and investors shouldn't opt for a third bubble. Logically, diversification involves investments which move in a different direction if other investments are trending down.
That's where gold – and potentially other precious metals like platinum, palladium, silver and copper – come in, though I see the white metals as carrying more risk and volatility than gold.
More of that later – for now, let's look at the logic of diversification and the best way to manage it.
Look at the world right now. Covid-19 is re-surging in Asia and many other places and most observers say the world's share prices and property prices are artificially high. So, if you have a need for diversification – and anyone with money invested in property and equities does – look for these two elements:
- 1) A deep market (meaning a lot of volume being traded) and
- 2) Liquidity – meaning it is always easy to find a buyer, easy to get into the market and easy to get out
Gold is easily the best choice in regards to those two factors. There's been a lot of fuss in recent times about Bitcoin. People have called it "the new gold" and, sure, it has a role to play. But it fails the above test because it simply isn't deep enough and liquid enough.
I know someone whose Bitcoin investment soared up to $20,000. But he sold it for only $3000. Why? Because it is such a small market, he couldn't find a buyer. They were all sitting on the outside, waiting for the price to drop – and that's exactly what happened. Bitcoin is also ripe for being hit by regulators – it's unregulated at the moment and it's a bit of a financial Wild West – there are no rules.
"Synthetic" investments like futures contracts (where you own a piece of paper but not the underlying asset) means that you are exposed to price fluctuations without actually owning anything physical – not, I say, very good insurance.
The rule of thumb is that a conservative investment is that 20 per cent of total net worth (outside your family home) should be in something like precious metals. Even the massive hedge funds hold gold, because they know it will help get them out of bad positions.
Look at the last time the world experienced a big backwards step – the global financial crisis of 2008. The gold and silver price rose steadily from 2000 and, when the stock market crashed (as did the property markets round the world), even gold fell by about 30 per cent in US dollar terms, (though the collapse of the New Zealand dollar kept gold stable in Kiwi terms).
Then gold rose and rose again to US$1921 in 2011 – a 270 per cent increase from its 2008 low. In New Zealand dollar terms, gold went from $837 per ounce to $2310, an increase of 275 per cent with no initial dip.
This is how gold is meant to perform, protecting the downside risk in times of trouble and behaving e predictably under normal market conditions. Gold and silver helped to counteract losses from the huge stock market and property bubbles. Precious metals also come into their own when governments, as many are now doing (including New Zealand), print more and more money to manage their way through Covid-19 and other pressures.
Gold and silver are real money, real assets – not some contrived financial manoeuvre – and they come into their own when the going gets tough.
We never say people should put all their money into gold – but it should be part of your investment portfolio. Financial history proves that gold protects your wealth from big downturns and we consider it the ultimate insurance in a financial portfolio.
That said, what about other precious metals like platinum, palladium and copper? Well, both platinum and palladium – the latter used in catalytic converters – have soared recently. However, in my view, they are more volatile than gold or silver.
People really need to do their homework and understand the market. For example, palladium attracts GST – so it costs an extra 15 per cent, because it is used in jewellery as well. Platinum doesn't – and neither does gold and silver.
That can catch people out, as can the spread between the bid and ask (the bid is the maximum price a buyer will pay; the ask is the minimum the buyer will pay for the same asset). For palladium, the difference between bid and ask is $150. The difference between bid and ask on gold is 60 cents; $5 for platinum.
Those are the kind of things people need to know and which will affect their choice of a diversification investment designed to protect them.
For more information and to see graphs tracking the rise in value of gold, silver, platinum and palladium over periods ranging from one week to five years, click here.
*NZ Gold Merchants began in 1975 and brothers Tony and Richard Coleman began buying, refining and selling gold and trading in precious metals in 2006. They were the first New Zealand company to produce local silver bars and the first to offer gold chain manufactured with local gold.