Gold is back in the limelight after a stellar year so far, and back in investor favour as a safe-haven investment, and a portfolio stabiliser, working to lower overall portfolio volatility. But the yellow metal’s traditional drawback is also more apparent in a low-rate, low-return world – it doesn’t pay an income.

And as Paul Rickard, co-founder of Switzer Super Report, points out, with Australia typically having higher interest rates than Europe, the opportunity cost of holding assets that don’t pay income is higher for Australian investors than Europe – which cannot help but come into investor thinking.

But thinking about gold in terms of income “misses the point” of the commodity, says Kris Walesby, head of ANZ ETFS (a joint venture between ANZ Banking Group and London-based ETF Securities). “I actually hate this question, because gold’s lack of income is not a weakness. Investors go into gold for reasons nothing to do with income,” he says.

“The real weakness is Australia’s obsession with income, which is fair enough given the effectiveness of franking credits. But most self-managed super fund (SMSF) investors have more than 70% in equities – which is well and truly more than enough. If they’re putting 10 per cent of their portfolio in gold, we think they’re not looking for income.”

Walesby says Australian investors are actually using gold as a hedge against the equity risk that is entailed in their large equity weightings. “A lot of SMSF investors are in equities in such weightings to try get the income, but there have been situations recently when banks are returning great dividends – but getting destroyed on the capital account. We need to understand the total return perspective – whether gold is generating income or not is totally irrelevant,” he says.

Jordan Eliseo, chief economist at precious metals bullion dealer ABC Bullion, says: “Studies consistently show that maintaining a 5 per cent–10 per cent allocation to gold plays an important role in portfolio design, most notably in lowering overall portfolio volatility.

“Obviously in periods of turbulence we usually see short-term spikes in the gold price. But over the past 15 years, gold has moved from sub $500 an ounce in Australian dollar terms to over $1,700 an ounce, so it has played a very important role for investors. More recently we’ve had a low real interest rate environment, and that’s seen a lot of our self-managed SMSFs lift their gold weighting – they most commonly have 10 per cent–20 per cent in gold – as a cash alternative in a low real rate environment, and a hedge against equities volatility.”

Historically, says Eliseo, during periods of equities volatility, gold gives the best returns of the ‘risk free’ assets. “Investors around the world are dealing with an environment where real rates of return on cash are effectively negative. The gold price tends to increase on average by more than 20 per cent when the real cash rate is less than 2 per cent, because people get worried about what the low interest rates are saying about the overall market and economy. Gold prices are entirely demand-driven so during these periods the price goes up, which is what we are seeing right now.”

More recently, an income angle to gold has arisen, in the form of greater dividends than ever before from gold mining stocks. But as an investor in gold producers, Peter Hall, founder and chief investment officer of funds management firm Hunter Hall, pines for the traditional strategy of reinvesting earnings to find more gold.

“I don’t think we can really expect gold to pay us a dividend. St Barbara, for example, is about to pay off its debt and would be in a position to pay a dividend. But as an investor, we’re looking for the gold stocks in our portfolio to create value, if we can buy those shares cheaply.

“There are a lot of gold companies that have very interesting exploration ground. There’s two sources of wealth creation in a gold stock: (1) the exploration potential, finding more gold, and (2) the increase in value of their in-ground reserves, as and if the gold price goes up. That’s the wave that we’re looking to ride,” says Hall.