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At the time of writing Gold has hit yet another high topping $4,000. It’s now up 50% year to date. Bitcoin at $122,000 is up 30%.  Do we wish we had bought into these long ago – of course we do – so why didn’t we?  Let’s look at Gold.

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Warren Buffett has always summed up Gold as being something that gets dug up out of the ground in one country to be buried in another hole elsewhere and have people stand around guarding it. It has no utility. Gold is the go-to asset for those who fear all other assets, especially paper money - Bitcoin too for that instance. The only Gold we hold for clients is via Personal Assets Trust which has around 11% of it in their portfolio. It’s a great fund and the manager, Sebastian Lyons is often described as “selling fear”. But when buying it you must hope that there is someone else out there who will be more fearful than you to buy it from you at a higher price.

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In this regard it makes it a speculative, and therefore a volatile, investment and the same goes for Bitcoin. At this stage chasing it smacks of FOMO. Consider this – even if we had advocated that 10% of your portfolio was held equally between these two investments it would only have added 4% to the overall returns. We have no idea what the future returns of Gold and Bitcoin will be as it relies on willing buyers. Whilst we cannot predict share prices from one day to another, we can make a judgement on which companies are worth buying for their future income stream based on any number of factors, such as pricing power and barriers to entry. A typical way of determining whether we would be paying the right price for an asset is discounting the future value of cash flows, but as neither Gold not Bitcoin generate cash, we might well be paying over the odds.

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We have nothing against investors holding some of their funds in speculative investments, so long as they understand the risks. We wouldn’t advocate it however for those seeking an income, as it doesn’t do so. We prefer to invest into companies that produce something you can use, like cash.  As Buffett says, “It’s a lot better to have a goose that keeps laying eggs, than a goose that just sits there and eats insurance and storage.”

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Comments from James Scott-Hopkins, Founder, EXE Capital Management.

The views are those of the author only. The above does not constitute a recommendation to buy specific funds or assets and advice should be sought from your financial advisor as to the appropriateness of this in your portfolio.

The value of investments can fall as well as rise. Past performance is no guarantee of future returns.

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