SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
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Alternative Investments 1 – Gold and other precious metals
As any financial planner would tell you, we should diversify our portfolio into different asset classes. The most common asset classes are properties, shares and cash but there are other lesser known ones as well. For smaller super funds like ours, property was not really an option. Although it is now possible for SMSFs to borrow money to buy property, I personally do not think it is a good idea because most of us already have a large exposure to property outside of super. For most people, the biggest part of their wealth other than super, is in their own home. As negative gearing is a popular tax minimisation strategy in Australia, many Australians (ourselves included) also own investment properties as well. Investing our super in properties would be putting all our eggs into one basket i.e. property.
At the start of 2008 our super portfolio was mainly in cash. With all the volatility in shares, we did not want to have much exposure to shares in our portfolio. With governments printing money freely while aggressively slashing interest rates, cash was not a much better option as we were really not sure what that would do to the value of the dollar and how much yield we can get. One asset class we definitely wanted some exposure to was commodities, especially the kind that was of a non-renewable nature like precious metals. My rationale for having some of these assets is simply that commodities are real assets and there is only so much of this stuff available so it will always have an intrinsic value. However, we did not want to have to deal with the physical commodity so we decided to buy Exchange Traded Funds (ETFs) that closely track the price of the physical commodities. ETFs are traded on the stock exchange just like stocks. For more information on ETFs, please refer to the links on the sidebar.
In June 2008 we put 10% of our portfolio in gold and 10% in silver by buying units in GLD and SLV which are popular ETFs that track the price of Gold and Silver. GLD and SLV are priced in USD and are traded on the US stock exchange. I did not know at that time that there is an ETF for gold that is traded on the ASX under the code GOLD. Commodities were still in an uptrend at that time and the price correction looked like a short term pull back (buying opportunity!) but little did we know that the commodities crash was just about to begin. We also thought gold and silver prices would go up because the US dollar would continue to weaken and never thought that the USD would soon be considered a safe haven currency when the financial crisis turned global. In USD terms, our investments in gold and silver were badly hit when commodity prices crashed from July to November 2008. However, in AUD terms, our gold and silver investments still showed positive returns because the Aussie dollar also dropped against the USD. The positive return is attributed purely to luck and not skill as we were actually bearish on the USD. From this experience, we now think that it is probably not a bad idea to convert some AUD to other currencies when it is strong but as we plan to retire and live in Australia, we will keep most of our investments in AUD to reduce our currency risk.
Gold prices have since recovered to break even point but silver is still showing a 27% unrealised loss. As GLD is also optionable, I have also been selling calls (see my April 24 post for more detail of this strategy) to help reduce my cost base for GLD from $88 to $81.
Christina
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