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SMSF Investment Strategy #3 – Gold and Other Commodities As Alternative Investments

As any financial planner would tell you, we should diversify our portfolio into different asset classes to manage our risk. The most common asset classes for retail investors are properties, shares and cash but there are other lesser known ones as well such as gold and other commodities. For smaller Self Managed Super Funds (SMSFs) like ours, property was not really an option because we did not have enough funds to buy property. 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 minimization strategy in Australia, many Australians (ourselves included) also own investment properties as well. Investing our super into properties would be putting all our eggs into one basket so we prefer to invest our super funds in other asset classes.  

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 or oil. 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.

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. There are also commodity ETFs such as USO which tracks the price of crude oil for those interested in investing in oil, and DBA and MOO for those interested in agricultural commodities.

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 US dollar. Although these investments have not generated stellar returns, I am still happy to hold on to them as alternative investments to stock and cash, just as a diversification for our investment portfolio.