Does Gold Pull Its Weight?
The trouble with tweeting is that the admirable discipline of condensing your thoughts into a few words is lost in a serious and complex argument where you cannot address any issue in detail and context. I have been involved in a long exchange with someone using the name of Iron Lad over the merits of investing in gold.
Those who bought gold at the last peak in 1980 and held on grimly through 20 years of decline were ultimately rewarded handsomely when gold eventually took off at the turn of the millennium.
My argument is that shares and property are a far better investment for most people because they offer income (dividends, rent or, for owner occupiers, an escape from paying rent) combined with the opportunity for capital growth.
Neither shares nor property prices go up all the time but the point is that in bad times you have income to offset your losses while in good times you gain twice over. My objection to gold is that it offers no income and may actually cost you money in storage and insurance.
It is true that gold holds its value over time against currencies, which are subject to inflation. In fact the longer term you can hold gold, the better it is likely to work out. This equation of gold against currencies has been distorted, and will continue to be distorted for several more months if not years, by the pitiful interest paid on savings. Even so, in any period where the price of gold is falling you are still better off earning 0.1% in interest on a savings account.
Another distortion at the moment is that bonds are overpriced and anyone buying them now will get an artificially low interest rate with the prospect of a sharp fall in bond prices to come as reality eventually kicks in. So you cannot at this stage recommend switching out of gold into bonds, although bonds will probably be a better investment once they are priced realistically.
Those who bought gold at the last peak in 1980 and held on grimly through 20 years of decline were ultimately rewarded handsomely when gold eventually took off at the turn of the millennium. The problem is that few people work on a timetable of more than 10 years and if you need cash in the meantime you may be forced to sell out at the wrong moment.
We have only a comparatively short timespan in which to judge the movement of the gold price. Gold was pegged against the dollar until the early 1970s and it inevitably soared once the artificially-low link was broken. After the peak in 1980, gold fell rapidly, not because it had lost value but because the rise had been heavily overdone.
Nonetheless, if we take 1970 as our starting point, the FTSE 100 index is a clear winner over gold even without taking account of all the dividends paid in the past 40 years.
Yes, you can hold gold as part of a balanced portfolio just as long as you are aware of its pitfalls and as long as you are taking a long term view. You can also buy and sell gold short term if you find you are particularly good at predicting movements in its price and you are prepared to take frequent losses when you get it wrong.
I would also agree that holding gold is vastly superior to fine art, wine or other collectibles as a store of wealth. Gold has a standard weight and quality so you know what you are getting. Collectibles are subjective and more prone to fall out of fashion. Precious gems vary enormously in size and quality.
One scenario that does favour holding physical gold is the collapse of debt-laden developed countries. The US, UK and Europe are still piling up government debt and Japan has just embarked on a debt-fuelled boost to its stagnant economy. If inflation takes hold then the value of currencies will fall and gold will once again come into its own.
I find this picture unduly gloomy and feel that if the end of the Western world as we know it does come then we are all completely up the creek anyway whether we possess gold or not.
Iron Lad argues strongly in favour of gold and you can see his views on his Twitter account @The_Iron_Lad. I respect his views but I stick to my guns that shares represent a far better investment. They do not depend entirely on new investors coming in and offering a higher price.
Turnaround at Tristel
Another potentially interesting small company popped up while I was on holiday: Tristel (TSTL), an AIM-quoted maker of disinfection and other hygiene products.
Its financial year runs to the end of June and a trading update to mark the financial year end indicates a considerable improvement from what was a pretty poor first half to December. Second-half revenues were up 40% from the first half and an expected profit of £900,000 will more than wipe out the first-half loss of £600,000, although it must be noted that profits, as well as revenue, for 2012-13 are down on the previous year.
One important plus point is a return to a positive cash flow that has turned net debt of £400,000 on 31 December into net cash of £500,000.
Tristel has three divisions, human healthcare, animal healthcare and disinfectant products, which spreads the risk, as does a branching out into international markets with overseas sales representing 30% of total sales. One does hope that the new Russian sales operation works out well – other British companies have found this market problematic - but New Zealand and Germany as major existing markets provide stability.
Preliminary results will be released on 14 October and in the meantime house broker FinnCap is holding off upgrading its forecasts for the year just begun but it does expect a continued improvement.The shares are well down from 45p a year ago to around 25p after that torrid first half but have perked up since the reassuring trading update.
I do not look to invest in AIM stocks myself but am aware that many readers are interested in promising small companies. Tristel could offer a chance to gamble on the turnaround continuing at anything up to 35p.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
Morningstar's Most Popular
10 Most Popular Investment Trusts in Q2
A common theme of the most frequently viewed investment trusts in the last quarter was depth of expertise among the management.
10 Most Popular Funds in Q2
Japan equity is among readers' favourites, while natural resources have fallen off the list amid fears the commodity “super cycle” is over.
10 Most Popular ETFs in Q2
Investors' growing interest in the developed markets' equity rally was evident in the second quarter of 2013, while gold also maintained its allure.
6 New Stock Reports from Morningstar Analysts
ARM, BP and Glaxo are among the latest research reports to be launched by Morningstar's equity analysts.
Don't Get Caught Out by these Investment Trust Traps
Morningstar's investment trust analysts share three common behavioural mistakes to avoid.
