Q: I am concerned about investment risk and the uncertainty in Global Share markets. I am thinking of investing in gold. Can I own physical gold inside a self-managed super (SMSF)? Is it a good idea?
A: Investment risk reflects how much volatility you are prepared experience in your portfolio as a result your choice of investments. Those relying on a fixed amount of capital typically would prefer to reduce the amount of volatility in their portfolio as they cannot afford to diminish their capital pool when it is relied upon to provide regular income. Typically a retiree would diversify their portfolio between around 50% Growth assets such as shares and property and 50% defensive assets such as cash and Fixed Interest to provide a balance between growth and income.
I dont believe investing a meaningful portion of your wealth in Gold is a good idea. The world Gold Council recommends that investors should hold around 2.5% of their portfolio in Gold for a low risk portfolio up to no more than 10% for a high risk portfolio.
Gold has historically been used as an investment hedge against volatility in share markets. When share markets are volatile, the price of gold typically does not correlate. When share markets fall, history would suggest that this is a positive for the price of gold.
The price of gold is denominated in US dollars. This is a positive when the value of the Australian dollar is falling but a negative if the Australian dollar appreciates in value.
Investors can gain exposure to gold in a number of ways; buy shares directly in gold mining or gold royalty/streaming companies. Invest in managed funds that seek to invest in gold mining companies. Purchase exchange traded funds (ETFs) that seek to replicate the price of physical gold. Alternatively, purchase gold bullion in the form of coins, ingots or bars.
Whilst gold bullion can be purchased within a SMSF, you expose yourself to additional costs and risk compared to other alternatives. You need to factor in the costs of storage and insurance, the risk of theft and the inconvenience of proving to your fund auditor the existence of the gold owned by the fund.
Gold Bullion can be sold, but you are at the mercy of the spot price of the commodity at the time you wish to sell. The spot price of Gold in the past 10 years has ranged from US $1890 to $1050 per ounce. The difference between what gold is sold for and bought (the buy/sell spread) can be between 3 and 10% making trading gold expensive in comparison to trading shares, Managed funds or ETFs.
Gold does not generate an income. Unlike conventional investments, the asset itself will not grow in size. It is a static lump of metal, whose value will rise and fall on the basis of demand.