Ollie Smith: I am getting a lot of adverts online for gold. So, on a sunny day at the end of August I'd like to ask Morningstar Investment Management's Global CIO Dan Kemp why.
Dan, thanks for joining me. What is it that makes gold so marketable during a period of economic fear or even crisis?
Dan Kemp: Well, hello, Ollie. And you've hit the nail on the head, there right at the beginning, which is that in an environment of crisis, people look for stability. And of course, before any of us knew anything about investment or even paper money, people were relying on gold as a store of value, and that's deep within us that we see gold in that way.
And so, it's not surprising that people are using this opportunity to ignite those fears of all things are happening around us, whether it's inflation or geopolitical instability and using that as an opportunity to try and sell you gold. It's a very different thing as to whether it's now a good time to buy gold, but it probably is a good time to sell it to other people using those fears as your hook.
OS: Sure. We'll all recall the moment in, I think, the late 2000s when Gordon Brown came under a lot of fire for selling off gold at rock bottom prices. What could actually go wrong if investors hold gold? Is it just price fluctuation?
DK: Well, I think, we have to understand what gold is and how that differs from the other investments that we have. And so, gold, of course, doesn't generate any cash flows. It's just there. You could wear it as jewelry. You could do other things, whether there are dozen uses, but it just exists and it lasts a long time, and that's why it's been the store of value.
Most investments – in fact, what defines an investment for us at Morningstar Investment Management is something that delivers a cash flow, something that delivers a return. And once you have a cash flow, you can value an asset based on its future expected cash flows and then take all those cash flows and kind of work out what you would currently pay for that cash flow stream.
Of course, gold has no cash flows and therefore has no intrinsic value, will not give you anything. And so, gold only has a value because of the way that we perceive it and also, of course, scarcity. There's only so much gold in the world. We can't make it. And so, people rely on that scarcity to give it value. So, it's very different from an investment asset.
So, what can go wrong? Well, when something doesn't have a value that can be clearly determined, then of course the price can move all over the place depending on people's appetites, depending on how concerned they are about the environment. So, you have a lot of volatility and no real anchor for your price.
OS: Sure. And just finally, gold tends to be marketed to people on the grounds that it's a good way to diversify. If it isn't a bedrock that's going to provide those real cash flows, are there other forms of real assets that are sensible to look at when you are diversifying?
DK: Well, with diversification, it's important to look at what you're trying to diversify and that will determine the assets that you want to own. What tends to happen with assets that are marketed for diversification is that people like to buy them when the price is high and then sell them when the price is low. And of course, they own them then at the wrong time for diversification purposes. So, while gold can provide some diversification, property can. Of course, the go to asset is government bonds as your source of diversification. So, there are lots of different ways of diversifying. But diversification is more of a mindset. You need to own something that's going to probably do nothing or even fall in price when other things are rising but continue to hold it to get that diversification benefit when prices fall, and that's a really tough thing to do.
OS: Fabulously explained. Thank you so much, Dan. For more on that and indeed, the UK's economic malaise check out Morningstar.co.uk. Until next time, I've been Ollie Smith for Morningstar.
