Alternative Investment  

How can gold fit into a portfolio?

This article is part of
Guide to investing in alternatives

Mr Hammond suggests: “In terms of asset allocation – it certainly makes sense to have a long-term strategic allocation to gold and most wealth managers have now woken up to this. 

“The amount will depend on your investor profile – what is your risk appetite and how much income do you need to generate – but typically you need to look at 1 per cent to 5 per cent for a long-term strategic allocation.”

Is there demand?

He points out the demand for gold is partly down to the fact there is limited supply, with only 175,000 tonnes in the world and supply only increasing by around 1.7 per cent a year. 

It also pays to know where demand for gold is coming from. The precious metal has a range of uses in jewellery, with demand coming from India and China in particular.

Gold also has its uses in technology, with the World Gold Council reporting increasing adoption of wireless charging and the development of features using LEDs has boosted demand.

Central banks also buy gold as they hold gold reserves.

Despite this, the World Gold Council reported demand actually declined slightly in the second quarter of 2017, compared to a year earlier.

Global gold demand in the second quarter was 953 tonnes, down 10 per cent on the second quarter of 2016 as inflows into exchange-traded funds slowed.

But within that, there are some bright spots, as Alistair Hewitt, head of market intelligence at the World Gold Council, acknowledges.

“Last year’s growth was solely down to record ETF inflows, while consumer demand slumped,” he notes. 

“So far this year we have seen steady ETF inflows in Europe and the US, jewellery demand has recovered with good growth in India, while retail investment and technology demand is up too.”

Having decided they want gold in their portfolio, what is the best vehicle for investors to get this exposure?

Mr Scott suggests: “We access gold through exchange-traded products backed by physical gold holdings. In our view those are a robust way to access gold without the costs and difficulties of owning gold in physical form.”

Annabel Brodie-Smith, communications director at the Association of Investment Companies, points out some investment company managers have exposure, particularly in the Sector Specialist: Commodities and Natural resource sector. 

“Investment company managers also invest in gold as a defensive asset,” she adds.

“For example, a number of investment companies in the Flexible Investment sector hold gold, with Personal Assets, which has a capital preservation strategy, currently holding 9.7 per cent of their portfolio in gold bullion and Ruffer holding 5 per cent of their portfolio in gold.”