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All that glitters
When I was presented some months ago with the concept of a listed investment providing direct exposure to gold for super funds as well as other investors, I was sceptical, to say the least. I am no ‘gold bug’. But as a super fund trustee, I have lately been more than usually conscious of risk, and I was broadly aware that gold has some ‘safe haven’ character (that is, it tends to be in demand when investors are retreating from other asset classes). And I knew that historically, it has been a favoured hedge against inflation. So I agreed to have a look at the proposal.
Up until now, super funds have typically gained an exposure to gold only indirectly, through holding equity in gold mining companies, as part of an exposure to the resources sector. Direct investment in the metal, if not technically prevented by the terms of many trust deeds, has been too costly and cumbersome to be practical.
The concept of a gold bullion security listed on the Australian Stock Exchange (a stapled security combining a preference share with ownership of a unit of physical gold) addressed both of those inhibitions. I became more interested. But what persuaded me that the concept had real merit — that it offered a new and potentially useful portfolio element to trustees — was the report of an extensive study by PricewaterhouseCoopers actuary David Knox. He analysed in great depth the role that a (relatively small) gold exposure could play in a typical Australian super fund portfolio.
Knox’s key finding was that, while all the main asset classes are positively correlated with each other, gold is not correlated with them. Rather, it has a (small) negative correlation with the main asset classes held in super portfolios. In the Australian context, having several per cent of a portfolio exposed to gold would have affected portfolio average yield very little over the past decade, while significantly reducing volatility of overall returns. Knox’s study implied that an efficient portfolio over that period would have contained somewhere between 2 and 7 per cent gold exposure.
I also reviewed some other studies, including an American one which divided a considerably longer history into sub periods — those where financial markets were fairly stable and those where markets were unsettled. This study found that gold’s ‘portfolio insurance’ effect was appreciably greater when markets were turbulent — it came most strongly into play against extreme movements in other asset values.
Gold may have no running dividend or interest yield, but the studies confirm that over the very long term it is indeed a classic inflation hedge — and not just a ‘safe haven’ in particular episodes when asset markets become riskier. So over long periods of time, gold typically appreciates in money terms: in Australia over the past half decade, gold in fact slightly outperformed cash.
None of this suggests that responsible fund trustees should shift to a major gold exposure. However, depending on the risk profile of the fund’s members, the prospect of a significant reduction in volatility (especially downside!) at little cost in yield may make a small exposure attractive. Gold bullion securities offers direct, efficient (low cost) and liquid way to gain such an exposure — without the bundled corporate risk inherent in gold mining shares.
It was on those considerations that I agreed to become involved in the governance of the venture, Gold Bullion Limited, set up to create and issue the securities. I believe this new tool is well worth considering by super fund trustees and their asset allocation advisers. A growing number of investors out there seem to see value in this tool. By the end of May, only about two months after a low key launch, there were nearly 800,000 GOLD securities on issue, providing their holders with absolute ownership of 80,000 ounces of gold, held in identified bars in London vaults.
— Vince Fitgerald is chairman of the Allen Consulting Group.
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