Im Buying Gold (Gold Priced in British Pounds May 2013 Update)

Gold when priced in USDs closed on Friday at a nominal $1,388.30. Convert that into GBPs and youre looking at a Nominal Gold Price of 912.53. Staying in Sterling that is a Nominal Gold month on month price fall of 5.9% and a year on year price fall of 8.4%. The chart below shows the Nominal Monthly Gold Price in s since 1979.

Click to enlarge

If we then adjust this Gold chart for the continual devaluation of Sterling through inflation we can see Real Gold Prices which are shown in the chart below. If this is of particular interest then you might also be interested in understanding if Gold can protect UK Investors from inflation. The key Real Monthly Gold Price metrics are:

• Real Gold Peak Price was 1,199.2 in January 1980. At 912.53 we are 23.9% below that peak today.
• The long run average is 542.96 which is therefore still indicating a very large potential overvaluation.

• The trendline indicates the Real Gold Price should today be 506.36 which would indicate even further overvaluation.

I aim to hold Gold within my own Low Charge Portfolio. This isn’t because I wear a tin foil hat or think that the world is about to go all Mad Max. Its because I want to hold commodities within my portfolio as they have a different correlation with my other asset classes and Gold (unlike many commodities for investors) if bought correctly is one commodity that wont suffer from contango or backwardation .

I want my asset classes to have different correlations so that hopefully as some are rising in value others are falling in value. I can then be selling those that are rising and buying those that are falling. The perfect scenario would be 2 assets that have a negative correlation with the Holy Grail being a correlation of -1.0, however unfortunately they dont seem to exist. If I look at Gold vs say the FTSE100 since 1993 we find a correlation closer to 0.26 which while not negative is still considered to be a weak or low correlation. To visualise this a little differently the chart below shows a comparison of the yearly price change of the FTSE100 (UK Equities) compared to Gold when both are priced in s.

Click to enlarge

On this chart you can see a data point coloured blue. This represents today where we find gold down 8.4% and the FTSE100 up 13.3% year on year. My investment strategy requires me to rebalance an asset class whenever it moves away from my target allocation by 25%. The downwards move in Gold, the upwards move in my Equities generally plus large injections of new money meant I was forced to rebalance my Gold holding this week by buying more gold. So even though the data above suggests Gold might still be overvalued my mechanical strategy forces a buy. Will I be right or wrong? I have no idea as I’ve proven that I am rubbish at predicting market moves but that I am becoming a good investor and so only time will tell.

As always do your own research.

• Last gold and FTSE 100 price actual taken 31 May 2013.
• All other prices are month averages taken from the Bank of England and Yahoo.
• May 2013 inflation is extrapolated from the Retail Prices Index (RPI).