O
neof theprimaryreasonscitedforowning
goldis thatit workswellasaninflation
hedge,butdoestheevidencestackupfor
thisclaim?Theansweris yesandfortunatelywe
are,rightnow,in themidstof a periodwhenthose
qualitiesareshiningbrilliantly.
TheWorldGoldCouncil,oneoftheworld’s
leadingauthoritiesongoldanditsinvestment
andindustrialusageacrosstheglobe,hasinves-
tigatedthecorrelationbetweenthegrowthin
negativelyyieldingdebtaroundtheworldand
gold’spriceincrease.
Althoughmostdevelopedworldinterestratesare
positive(abovezero),thereis a crucialdifference
between“nominal”interestratesand“real”interest
rates.If youtakethe“nominal”interestrate,which
is 1%in Australia,andsubtracttheexpectedrateof
inflation,currentlysomewherebetween1.5%and
1.7%,thenthe“real”rateofreturnis -0.6%pa,so
youareeffectivelylosing40¢per$100eachyear.
TheGoldCouncilhasshowngold’spriceis
trackingtheamountofglobalnegativedebtvery
closely.Andwhyis this?Becauseoneofgold’s
purposesis topreservecapitalvaluewhenfiat
currencies(currenciesbackedbythefaithand
trustina particulargovernmenttohonourthe
worthofthemoneyissued– forexample,US
dollar,Australiandollar,Britishpound,euro)aredeclininginvalue.Effectively,golddoesn’t have
a yield,whichmeansit’szero,butplainly this is
higherthanthenegativeyieldofdebt.
Gold’sabilityto hedgefornegativeyields is even
morestrikingwhenwelookat thisinAustralian
terms.BetweenJanuary 2017 andJuly 2019, it is
clearthegoldpriceversusthedifference between
nominal(ReserveBank)andrealinterest rates
diverges.A traditional5%allocationto gold would
havemoret ha noffsett helossof pu rcha si ng power
overthisperiod.
However,goldisn’tjustaboutinflation hedging.
It canalsobeusedforextreme“eventrisk”. This
is financialspeakforeventsthatareunexpected
andthatalmostalwaysnegativelyaffect world
economiesandtheirrelatedwealthand growth.
Insuchtimesgoldhas,timeandagain,had a better
outcomethanequitymarkets.
Goldhasprovedtobeanexcellent inflation
hedgeinmanysituations.Critically,right now
it is performingthatroleandtherefore investors
concernedwiththeriskoflosingtheirworth via
theerosivepowerof inflationshouldconsider gold.
Andforthoseinvestorswhoareequally, if not
more,concernedabouttheriskofdrastic, unex-
pectedeventsthatcanveryquicklydestroy hard-
earnedinvestments,it is difficulttogo past the
trackrecordof goldto offsetthosepossible losses.COVER STORY
WHEREI WOULD
INVEST$10k▲KRISTIAN WALESBY^ GOLD
As with many investors, my
portfolio has many historical
investments. Although I’ve
done well from most of them,
in hindsight they were risky and
I would do things differently if I
could start from scratch today.
The best of the bunch from
my current portfolio are Alpha-
bet and Apple, up 180% and
220% respectively. But to gain
exposure to technology, today
I would buy an ETF covering the
whole technology sector, which
potentially would have earned
$1500 on top of my $10,000.
I would also buy two
Australian-focused yield
ETFs. Although having too
much invested in your country
isn’t generally a good idea, with
Australia it is slightly different.
First, Australia has a high-yield-
ing corporate environment. Com-
panies have had to pay out high
dividends because the interest
rate has been higher. If they don’t
pay more than the interest rate
in a savings account, an investor
will always take the savings
account as it’s risk free. That isn’t
the case today, with interest rates
lower than they ever have been,
but the history of high corporate
distribution rates remains.
Second, Australia has frank-
ing credits. So I would select
the Vanguard Australian Shares
High Yield ETF (ASX: VHY) and
the ETFS S&P/ASX 300 High
Yield Plus ETF (ZYAU). Because
you can't be sure which strategy
will do well at different times, by
selecting two you can, to a cer-
tain extent, “hedge your bets”.
KRISTIAN WALESBY
HEAD OF ETF SECURITIES AUSTRALIA
Is gold an effective hedge
against inflation?