Speculation or insurance? Advisers weigh in on retail gold frenzy

As reports flow in of investors lining up to buy gold at Sydney’s ABC Bullion store this week, two financial advisers have cautioned against succumbing to the hype as gold prices hit shaky ground.

Martin Place in Sydney has seen keen investors queuing up for hours this week to purchase gold coins and bars as a steady rally sees the asset surge 25 per cent in the last two months alone, bringing the value to a record high of $4,300 earlier this month.

But following the spike in demand this week, Money Management sister brand InvestorDaily reported a 6.3 per cent drop in gold price on 22 October, marking the precious metal’s biggest intraday drop in 12 years.

Speaking to Money Management on this sudden gold craze, independent financial adviser Andrew Saikal-Skea and Freshwater Wealth founder Roger Perrett both said there has been an increase in client conversations around gold of late.

However, Saikal-Skea suggested that this isn’t necessarily linked to the surge in demand seen this week, rather that it is in line with “what always happens” after an asset has had a sharp increase.

In a similar vein, Perrett said the increase in gold-related discussions is often part of broader discussions around diversification and inflation rather than an all-in move.

While he thinks it is unwise to be purchasing physical gold during this craze, Perrett believes the sudden spike in demand is largely driven by “fear and greed”, saying that gold is an “emotional insurance for some and a speculative bet for others”.

His firm’s office is based close by to the ABC Bullion store in Sydney’s CBD, and watching the queues has become a “spectator sport” for his team lately, he said.

Amid rising geopolitical tensions, persistent inflation, and a shaky confidence in government debt, he said all three of these are “classic catalysts for gold demand”, with physical ownership of an asset providing an added layer of comfort for investors.

Then there are some who he said are buying gold simply because they believe the price will continue to rise.
On the other hand, Saikal-Skea added that this demand may also be a result of investors “taking profits and looking for a place to store them”.

While purchasing physical gold may be the right choice for investors seeking a sense of security, Saikal-Skea said he prefers productive assets, noting that gold and other precious metals are speculative assets that don’t produce income.

He cautioned: “Be wary of chasing past returns. Once something has rallied, fear of missing out becomes a big driver. You need to look at the prospects of the investment as part of your overall portfolio objectives looking forward, and make sure it’s justified compared to other growth or defensive assets that you could own.”

As an alternative to purchasing physical gold, Perrett said it can be valuable for some investors to gain exposure to the asset through a product – such as an ETF – and only as part of a long-term, well-diversified asset allocation.

“I wouldn’t be also taking a tactical bet, especially a large bet on gold, because this is speculative in nature. It would become dangerous if people buy into gold as a sure thing. No asset is risk-free, and gold has had long periods of underperformance,” Perrett said.

Both advisers said that by opting for a digital investment vehicle over physical ownership of gold, this can allow for much easier entry and exit from these assets, as well as concerns over safe storage and insurance.