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Popular defensive options might be a ‘risky investment’

Gold bars

Investors have been warned to be cautious of gold as the safe haven in times of market volatility, with one economist calling it a “risky investment”.

Shane Oliver, chief economist at AMP Capital, has advised investors against holding long-term allocations of gold despite the current market climate, as the asset has a history of volatility.

Mr Oliver told Nest Egg he believes investors should seek to understand the fundamentals driving the gold market before incorporating the “safe haven” in their portfolios.

“The problem with gold is that all the gold that has ever been produced already exists,” Mr Oliver said.

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“It’s not ‘used up’. It doesn’t get used in any industrial process, unlike copper; it doesn’t feed people; it doesn’t fuel cars. So, it’s very hard to establish the underlying fundamental demand for it.”

He explained that the asset’s inability to be used in such processes means it produces no income. This makes it difficult to be properly valued or for investors to forecast future patterns of growth or decline.

“It’s a bit of a guessing game as to what it’s worth, which does make it highly speculative as an investment. I think investors need to be aware of that,” Mr Oliver said.

“When you buy it, you are hoping that you’ll be able to sell it to someone else down the track for a higher price, but you can’t point to economic growth or anything else as potentially driving that higher price.

“You have no reason to have that confidence.”

While he admitted that gold does have a place within portfolios as a means of diversification in times of high inflation or when governments are at risk of defaulting, Mr Oliver believes it is not an asset to be held long-term.

“It does have a role in portfolios, but it’s just too difficult to value to have it in there on a long-term basis,” he said.

Popular defensive options might be a ‘risky investment’
Gold bars
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