Back in December I upset a number of regular readers by saying that I was no longer an active buyer of gold. It wasn't quite as dramatic a move as it seemed. I'd been holding it in various forms since 2001 so the huge run up in price meant that my portfolio was beginning to look far too tied to its price.
Gold was also no longer the sure bet it had been a decade earlier. Back in 2001, it was historically cheap relative to everything from the price of oil to the cost of getting it out of the ground. By late 2011 it wasn't. At the same time, while I think of gold as insurance against an inflationary end game, it looked as if we were entering the deflationary stage of our crisis, with the main games in town being recession and deleveraging and the voices against more quantitative easing (QE) in the US and UK getting louder.
I added it all up, stopped thinking about gold and did some of the things I'm always telling you to do instead increased my holdings in a variety of investment trusts with reasonable yields and, more recently, started buying cheap European stocks. This is sensible stuff. History doesn't spell out many things clearly but the case for income investing is pretty clear (as is the case for buying things when they are cheap).
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Over the past 100 years or so, the real return on equities in the UK has been between five and6% a year. The capital gains part of that has come in at about 0.4% a year. So 90% of the total return from the UK equity market has come as dividends.
It's also worked well this year. Having hit a rather overexcitable all-time high of $1,923 in September 2011, the gold price has barely budged in eight months. Defensive dividend payers have: the market's fund managers appear to have collectively remembered the bit in their training about income investing outperforming growth investing over the long term and piled in en masse.
That's nice. But it doesn't mean I'm not still watching gold. I am. And I'm pleased I'm still holding it. Why? Because the world goes a little more mad every week. People used to tell me endlessly that gold is a useless asset because not only does it not offer an income but it has to be stored. So if you hold it, one way or another you pay to hold it. But that's now true of almost any half-decent government bond.
At the beginning of this month, you had to pay to hold the two-year debt of Switzerland, Denmark, Germany, the Netherlands, Finland and Austria (the yields on the bonds were negative). People don't laugh at the investors holding them (although maybe they should). They just think they are paying a reasonable price to preserve the purchasing power of their wealth.
But isn't that exactly what holders of gold are doing? I'd also argue that holding gold provides better insurance against crisis than these bonds. After all, sovereign nations can go bust. Gold can't. That's why it's been the insurance of choice for those looking to preserve their wealth for thousands of years.
For proof that hasn't changed, look to the Swiss border: earlier this year a couple of sniffer Labradors found 50kg of gold hidden under the seat of a car crossing from Italy.
The other reason to love gold again might be what Ruffer's latest note calls "tantalising hints and signs" that the "central bank cavalry" of the west might soon get on with making the world's debt go away with a bit more quantitative easing. We've had Mario Draghi's promise (as yet unkept) to do "whatever it takes," "soothing words" from Ben Bernanke and in July the vote here for another £50bn of QE. The timing might be uncertain but it is pretty much a given that there are massive rounds of money printing still to come.
Deflationary pressures usually lead to inflationary behaviour on the part of the authorities. It's hard to see why that wouldn't continue to be the case in 2012.
I'm guessing that many readers already hold gold. But if you don't you might think about gold mining stocks. These are supposed to outperform gold on the way up. But for the last ten years or so, grappling with rising costs and finding that investors prefer the simplicity of investing in gold via exchange traded commodities (ETCs), they have not.
The FTSE-listed gold miners are down about 20% in the past 12 months. However, their time may be coming. ETCs aren't as loved as they were and a spate of M&A activity a Chinese company may bid for African Barrick , one of the largest UK-listed gold producers is drawing attention back to the sector.
We might also again draw some comfort from market history. The miners lagged behind the gold price back in the early 1970s but then staged a fabulous catch-up, rising 60% in the first five weeks of 1974 alone.
I'm invested in gold mining via the BlackRock Gold & General Fund, which is down 20% in a year, but for those of you with the mental strength required for DIY mining investment, I offer some suggestions from RFC Ambrian's latest gold report for further research.
Their top pick among the gold producers is Toronto-listed Mandalay Resources, among the developers it is Aim-traded Aureus Mining (as a top takeover target) and among the explorers it is Australian junior Papillon Resources on the basis of an "impressive" project in Mali.
This article was first published in the Financial Times.
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