Not going for gold

Gold has performed well in the first quarter of 2016 and is attracting more attention than it has for years. This article looks at the reasons for investing in gold, its recent performance and why it currently does not fit into our long-term strategy

Gold in the news

Gold was one of the top-performing asset classes in the first few months of 2016. Its price rose 18% from around $1,060 an ounce in December 2015, to around $1,250 an ounce at the time of writing. At the same time, the volatility in stocks and bonds was significant with shares making their worst-ever start to a year. Stocks have recovered much of those losses, but are still fluctuating around the levels at which they closed 2015: The FTSE 100 is 3% down on its end of December close, while the S&P 500 was down 11% on the year by late February before recovering to being 2% up on the year at the time of writing.

So gold has provided growth when other investments have been performing badly. The perception that gold can offer a “haven” from turbulent markets is one of the key reasons that people invest in the metal, but it’s not the only one.

Why invest in gold?

Gold can act as a store of value. Unlike paper currencies or similar forms of value, gold has tended to maintain its value in real terms over time. That is to say, as inflation has reduced the spending power of money, gold has tended to rise in nominal value and, therefore, retained its real value. For example, if inflation is at 5% then £1,000 in cash will not buy as much next year because prices would have increased by 5%. However, over much of the twentieth century, the value of gold tended to move in a similar pattern to inflation.

Also, linked to gold’s “haven” status is the fact that the inclusion of gold in an investment portfolio can add an element of diversification because the value of gold tends to move differently from that of stocks and bonds.

So with this background, one might expect Lloyds Bank Private Banking to include gold in its clients’ investment portfolios. But we don’t.

Historical context

To understand why we don’t currently invest in gold, it is necessary to review the historical performance of gold.

The combination of the financial crisis, concerns over inflation, debt and geopolitical troubles drove the price of gold up to around $1,800 an ounce in 2011. Thereafter, the price of gold fell to around $1,060 an ounce in December of 2015. That’s a 40% drop.

The long-term outlook includes a general expectation of low inflation. According to PwC, global inflation is projected to reach 1.8% for the G7 nations next year, and stay around that level for the foreseeable future*. As one of the key drivers of the price of gold, this does not provide much upward pressure.

Our view on gold

So the recent performance and outlook for gold demonstrate a performance profile that does not bode well. But in addition to this, gold does not offer a yield or interest, and we want our clients’ money to be working as hard as possible, not just when there’s a flight to safety.

More importantly, we invest for the long-term, by that we mean around 10 years. The recent movement of the gold price has been incompatible with our investment philosophy which pursues steady growth over the long term.

With this in mind, it is worth revisiting the five principles on which our investment philosophy is built:

  • Understand the risk and reward requirements of our clients
  • Focus on long-term strategy (around 10 years)
  • Diversify the portfolios to help mitigate risk and support growth
  • Use “best in class” fund managers who are specialists in their respective fields
  • Fine-tune the asset blend when appropriate in anticipation of short-term developments.


So, the price of gold tends to respond to the near-term expectations of inflation, interest rates and market turbulence. The prospects for inflation are low, so the prospects for long-term growth in gold currently are insufficient to make up for the lack of a dividend or for the opportunity cost of investing in our preferred alternatives, such as absolute return opportunities. In other words, as things stand, gold does not offer a sufficient reward to compensate for the risk. Therefore we are not investing our clients’ money in gold for the time being.

*Source: PwC Global Economy Watch, Economic projections, May 2016

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Important Information

Forecasts are opinion only, cannot be guaranteed and should not be relied upon when making investment decisions. The forecast of future performance is not a reliable guide to actual future results. Past performance is not a guide to future performance. Investors may not receive back the full amount originally invested and the value of investments, and the income from them, may fall as well as rise. No representation, warranty, express or implied, or undertaking is given or made as to the accuracy, reasonableness or completeness of the contents of this document or any opinions or projections expressed herein. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact, nor relied upon when making investment decisions. Any views expressed within this report are our in house views as at June 2016 and should not be relied upon as fact and could be proved wrong. The information contained in this article has been derived from sources which we consider to be reasonable and appropriate. This article may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) for any other purpose without prior written consent.

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