Going for gold

Gold is not a traditional investment for a pension portfolio for a variety of reasons, but that hasn’t stopped investors snapping up the precious metal in droves this year. According to the World Gold Council, demand for gold globally rose 21 per cent in the first three months of 2016 – the second highest increase on record.

During the same period, the number of UK pension fund investors in gold rose by more than a quarter, with an average investment of £35,000 according to the Pure Gold Company.

Now the UK’s Royal Mint, spying an opportunity to increase sales, has opened up to self-invested personal pension and small self-administered scheme investors for the first time since gold was made an eligible investment in 2014.

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Pension investors can now trade gold 24/7 via the Royal Mint website. You too could be the proud owner of a 100g gold bullion bar – or part of a 400g bar – lovingly stored in The VaultTM. All very exciting. But does investing in gold make investment sense?

As a general rule, commodities do not make ideal long-term investments, which is why many large pension funds and endowments tend not to make allocations to the asset class at all. The trouble is that they produce no income, unlike a bond, which pays interest, or an equity, which pays dividends. This means that commodities have no intrinsic value – there is no reason why they should be worth more in the future than they are today. Commodities simply rise and fall in price depending on the dynamic between supply and demand.

Super-cycle theory

Champions of the super-cycle theory will argue that as the world’s population grows and the commodity-consuming demands of emerging markets increase, prices must rise over the long term – just as they did in the first decade of this century. But that trend started to peter out in 2012 as supply caught up with demand – and as big commodity consumers like China started to slow down and eat less rapidly.

The trouble for investors with very long-time horizons – over 10 years – is that there is no compelling economic case for commodity prices continuing to rise. And without capital appreciation there is nothing to be gained from commodities. At least with an equity or bond the investor is compensated with cash flows that can, to some extent at least, be quantified and valued.

However, gold has never been a typical commodity. Investors use gold as a currency in its own right (although it is always denominated in US dollars) and as a store of value. This means it is an asset that will always be sought after and, therefore, will always have value.

On top of that, gold is used in the manufacturing of electronic components and computers as well as jewellery. It even has a role to play in modern medicine.

Versatile currency

Its versatility and high practical value, as well as its extraordinary long life and limited supply, made gold the original currency for early civilisations. At one time, physical gold stockpiles were used to back paper currency in the US and UK, and even now governments around the world maintain stores as emergency supplies, although the UK’s is somewhat depleted after Gordon Brown’s infamous policy of selling down half of our gold reserves from 1999-2002.