The Motley Fool

Is owning gold a good idea? Fund manager Magellan is thinking about it

Is owning gold a good idea? Magellan Financial Group Ltd (ASX: MFG) is thinking about it.

That’s not to say the investment firm is going to start putting money into it, but it’s just considering the factors involved.

Magellan is one of Australia’s best fund managers, perhaps one of the best in the world. Its returns have been excellent, its unlisted Magellan Global Fund has generated average returns of 18.44% per annum over the past seven years after fees.

The investment team, including Chairman & Chief Investment Officer Hamish Douglass, are clearly top performers.

But what about all the bad stuff about gold?

There are a lot of investment points against gold. It doesn’t generate any cashflow, it just sits there – which means it can’t really grow its intrinsic value like land or shares do over the long-term.

Gold has been an asset class for hundreds of years, if not thousands of years. It has great staying power. But, its return over the long-term has been quite poor – fairly close to inflation.

There are some people who think gold is old news, it’s cryptocurrency that will be the new alternative store of wealth.

So why is Magellan thinking about gold?

With interest rates being so low around the world, there’s a fair chance that the next move by central banks would be up. Typically Magellan likes to invest in defensive shares such as utilities for protection, but they wouldn’t provide capital value protection in the interest rates rising scenario. Bonds wouldn’t help either. Cash becomes worth less over time if inflation goes higher. 

Gold could be an alternative for cash and it would go up if markets panic, it would be one of the few assets that could perform well.

Mr Douglass doesn’t view gold as an investment, but something like a gold exchange-traded fund (ETF) could be an interesting idea. Gold may not have a calculable intrinsic value like a business, but neither do US dollars.

So that’s why Magellan is considering if gold could be an idea to pursue. It’s only a question at this stage. He wouldn’t recommend that people go out and buy a gold ETF just because Magellan is thinking about gold.

Mr Douglass also said that Magellan wouldn’t buy a gold miner. So, don’t expect Resolute Mining Limited (ASX: RSG), Newcrest Mining Limited (ASX: NCM) or Evolution Mining Ltd (ASX: EVN) to turn up in Magellan’s portfolio holdings.

The problem is that gold is volatile, we’ve seen gold prices change significantly over the past year. Gold generally goes down in the shorter-term when markets rise.

Foolish takeaway

Magellan is a great investor and I’m not surprised to see Mr Douglass thinking outside of the box of where to invest. But, over the long-term shares have proven to be the best asset so I think you can’t go wrong by buying excellent businesses at good prices.

5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Related Articles...

Latest posts by Tristan Harrison (see all)