5i Research - opinion on gold

November 22, 2012 (asked by Lance)

Question: Hi Peter: Portfolio questions about Gold:

In your view, is it necessary to maintain gold exposure all the time (given that the portfolio is small enough to maintain reasonable liquidity and allow one to be nimble) or is it something that one can move in and out of depending on how things are going?

In either case, what signs would cause you to increase/decrease exposure?

On a percentage of total investments basis, how much gold exposure do you think is appropriate at present and how high or how low could you see that going over the next few years?

Can one's gold exposure be expected to provide a good ROI, even if the various things it is supposed to hedge against aren't materializing over the next few years?

Finally, what category of gold investments would you favour to provide both the hedge/insurance aspect and a decent prospect of a return in the meantime. Thanks!


5i Research Answer:

We will answer in order of the questions.

(1) Unless you can time exactly when gold will spike (we can't!) we would always have some gold exposure. It is like insurance. You wouldn't take insurance off your house and then back on again.

(2) We would increase gold exposure on signs of (a) a rollover in the world economy. At this stage, if the ecomomy weakens further, there is only one option for governments :keep printing currency and spending. Any other option would be too dire for the economy to handle. (b) any increase in money velocity. Not to go into economics, but right now there is lots of cash in the system. However, inflation is low because no one is 'worried' about inflation enough to start lending, spending, hiring, and getting rid of cash (which would decline in value in inflation). If banks start lending aggressively, asset prices increase and so on, then that cash in the system will start moving fast, and inflation (and gold) will likely go up. We are, however, not near that point right now, but there is so much liquidity in the world in could happen before we expect it.

3) We would suggest 10% to 15% gold exposure now, going as high as 20% to 25% if and when inflation kicks in. Under an ideal gold scenario, however, your percentage would get higher quickly from 10% without further additional buying.

(4) We would not 'expect' much from gold in terms of ROI. But it will do exceptionally well under the right conditions, and as insurance needs to be there.

(5) Right now, we would buy senior gold companies paying dividends. They will do well under the right conditions, are far less risky than trying to pick a junior, and will provide some degree of income while we wait for inflation to kick in.

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