Gold excites the imagination and has been considered a store of value for millennia, but it remains difficult to value, cumbersome and inert.
The age of the great prospecting gold rushes is over but the spirit seems to linger in today’s market. Thrills of quick gains capture investors’ attention as much as it encouraged people to take up mining picks in centuries past. But luck remains just as influential: you may miss the seam and end up wasting your time. It’s impossible – or, at least, extremely difficult – to determine the path of the gold price. And, just like those old prospectors, you are not being paid anything in the meantime because gold does not offer a yield. In investment terms, that wasted time is an opportunity cost. But worse, there’s a chance that the price will go lower and you will lose money as well.
In some ways, the erratic nature of gold is why it’s so appealing – it is usually a good diversifier to other assets. However, in a world where the US is increasing its interest rates, we think that very opportunity cost for holding a non-yielding metal is rising.
We prefer to use other diversifiers, such as commodity trading adviser funds, quantitative derivative strategies and market-neutral hedge funds. As well as that, we are keeping higher levels of liquidity in the funds, including greater cash levels and conventional and inflation-linked US treasuries, where we are being paid to wait.
David Coombs is fund manager on the Rathbone Total Return Portfolio
Following several years in the doldrums, gold has performed strongly this year with the added benefit to sterling investors that the precious metal is priced in US dollars.
Historically gold has been used by investors as a hedge against inflation, although with little pricing pressure across the developed world, this clearly isn’t the reason for the strong performance this year. More likely is that gold is being used by investors for more general portfolio insurance purposes, in an era where the great monetary policy experiment from central bankers continues.
The fact that gold is a non-income-producing asset has deterred many investors in the past. However, today there is virtually no cost of carry and a yield of zero actually looks quite attractive compared with trillions of dollars of government bonds.
The real action has been among the gold mining stocks, with returns from funds that invest in this area having more than doubled since January. Unfortunately, the sector has few friends these days, with many investors having exited having suffered horrific losses since the gold price peaked at over $1,900/oz in 2011. Incredibly, in spite of the huge returns so far this year, five-year performance of gold funds remains deeply in negative territory while global equities have doubled.
Perhaps there is more reason to own some gold now than in the recent past but valuing the yellow metal is as challenging as ever.
David Hambidge is director of multi-asset funds at Premier Asset Management
The initial attraction was in gold miners, given the eye-catching valuations as a result of the significant bear market they had experienced since 2010. This follows the general trend of many investors, whereby they were (and still are to a large extent) skewing portfolios for a deflationary backdrop and away from value areas – such as gold equity.
Our positive view on the outlook for gold rests on the belief that inflation expectations are too low, and any sign of it returning should benefit some of these value areas. We believe that there are signs of gradually increasing inflation, brought about by a more stable oil price, low unemployment, wage inflation, and more recently the impact of import-led inflation due to the weakened GBP.
The prospects for gold are further enhanced by the apparent lack of conviction from investors that a stand-out safe haven currency exists. This has been driven by central banks appearing very focused on depreciating their currencies, with Japan leading the way, but most other nations also experiencing not insignificant monetary easing of some form or another. This raises the sentiment towards gold as a safe and liquid asset, in a world where they are increasingly hard to come by.
Gold equity and materials have responded very positively this year and we expect this to continue as inflation, and importantly, inflation expectations rise from their lows.
Robin McDonald is fund manager for multi manager at Schroders