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Why the ultra-rich are hoarding gold

Old fashioned scales weighing two gold bars in front of dark background, gold share price, newcrest mining share price
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Time to switch to gold?

With the S&P/ASX 200 Index (ASX: XJO) in full recovery mode, you would think that investors everywhere are basking in the gains that both ASX shares and share markets around the world have given investors over the past 3 months. After all, the ASX 200 is up more than 30% since its 23 March low.

But according to reporting in the Australian Financial Review (AFR), the world’s richest investors are not coming to the party. Instead of barrelling back into shares, the world’s ultra-rich are instead turning to the oldest of investments – gold.

According to the AFR report, advisers to the world’s ultra-rich are recommending as much as a 10% allocation to gold, which is far above the token amounts that were apparently being recommended before the COVID-19 pandemic.

This is despite gold prices rising more than 14% since the start of the year. One troy ounce of gold will set you back around US$1,723 today – or $2,520 in our dollars.

So why are the ultra-rich ignoring shares in favour of gold?

Well, it’s out of fear in my view. Fear of a second wave of coronavirus infections, fear of loose monetary policy, fear of asset bubbles and fear of inflation.

See, shares (despite their many benefits) are not an ultra-safe place to store your wealth if capital preservation is a priority, as we saw in March. And right now, there are growing signs that the unprecedented amount of government intervention in the markets (in particular the US) is driving the rally in shares prices we have been witnessing of late.

What happens if (or when) the US government starts tapering off quantitative easing and bond-buying? Or what happens if it never does? I think these are the questions that the ultra-rich are asking themselves right now. And the logical conclusion for a worst-case scenario is using gold.

Should we all copy the ultra-rich and buy gold?

I do think it can be advantageous to emulate and take lessons from wealthy investors. But I also think that the priorities of the ultra-rich and the everyday investor are disparate. The ultra-wealthy (in my opinion) are typically more concerned about the preservation of wealth rather than building wealth. In this context, I think using gold makes sense.

But I don’t think it makes sense for us Foolish investors who are trying to build long-term wealth with shares. Even though ASX shares are volatile, history shows us that they remain the best asset class for building wealth over long periods of time. We can’t really say the same about gold in my view.

So instead of selling all of your shares and buying up bullion, I think most investors will be better off just sticking to a long-term portfolio of quality ASX shares.

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Motley Fool contributor Sebastian Bowen 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.

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