Global gold investment shot up to the equivalent of 617.6 tonnes in Q1 this year, the second highest quarter on record, according to figures from the Global Gold Council and equivalent to $27.2bn (£18.8bn) based on prices of $1,250 an ounce. The industry body attributed the upsurge in demand to negative interest rates, stock market volatility and concerns about global growth.
ETFs were the “main engine” of this growth, according to the organisation, seeing inflows of 363.7 tonnes following three years of almost uninterrupted outflows. At BlackRock, one of the largest ETF providers, gold-based ETPs saw $4.1bn (£2.8bn) of inflows in May, second only to bond funds for net flows at the asset manager, while its gold miners ETFs saw inflows of $1.3bn.
Old Mutual Global Investors Gold and Silver fund manager Ned Naylor-Leyland says the market’s expectations around rate hikes will guide investor appetite in the year ahead.
Already this month gold prices spiked 2.7 per cent to $1,243.29 an ounce after disappointing US job figures led the market to doubt a June interest rate rise from the Federal Reserve.
“The thing that’s quite exciting about gold is that if people start to realise that normalisation is quite near impossible then substantial amounts of capital could flow into gold,” says Naylor-Leyland.
Gold miners saw an even better rally, enjoying their best day since the depths of the global financial crisis in 2008. VanEck Vectors Gold Miners ETF, for example, jumped 11.2 per cent on the day of the US jobs announcement.
For exposure to gold, head of investing at Axa Wealth Adrian Lowcock recommends the ETFS Physical Gold fund, which tracks the gold price less transport, insurance and storage costs.
In the gold miners space he recommends Evy Hambro’s BlackRock Gold and General fund, but says gold miners don’t have the safe-haven characteristics investors might be seeking from gold. Gold miners have gone through a “massive transformation” recently, says Lowcock, having failed to track the gold price in the last rally owing to poor management.
Investec Asset Management multi-asset manager Philip Saunders says the firm’s “gold-agnostic” funds have had around 5 per cent allocated to the asset via ETFs for the first half of the year, adding it has “unfortunately” not had a position in gold mining shares. Saunders describes the fund’s current exposure as “modest” compared to highs of around 7 per cent in 2013, but it has had “quite long periods” with zero exposure.
Tilney Bestinvest allocated to physical gold via ETFs across its multi-asset portfolios for the first time ever in October, benefiting from this year’s rally.
“We are living in fairly extraordinary times,” says CIO and fund manager Gareth Lewis, who admits some previous scepticism about the asset class. “Over the past three or four years excessive money printing has increased the correlation of asset classes. It was a case that gold had become relatively uncorrelated.”
Portfolio weightings are “relatively cautious”, according to Lewis, with slightly higher cash weights and overweight in sovereign debt, US treasuries and gilts, alongside physical gold ETFs.
But Liontrust multi-asset manager John Husselbee thinks investors were overly pessimistic at the start of the year. “Gold can serve you with an inflation hedge, which I think at the moment is better served by index-linked bonds, which also provide some income.”
Liontrust’s multi-asset portfolios don’t have direct exposure to gold, but higher risk funds have an allocation to commodities ETFs.
For those who can’t stomach gold as an asset class, Lowcock recommends absolute return strategies or cash. “Government debt tends to be another safe haven asset. The trouble with that is given where yields are there’s an increasing risk in that. You’ve got negative rates in Europe and Japan and you’ve got very low rates in the UK and the US.”
He recommends the capital preservation strategy run by Iain Stewart in the Newton Real Return fund, or the Standard Life Investments GARs fund, despite wobbles earlier in the year.
The change in sentiment that is driving gold inflows is happening at the margins, according to Naylor-Leyland, who owns gold and silver mining stocks, as well as bullion funds in his fund, which launched in March. “You’ve only seen a small shift in sentiment,” says Naylor-Leyland.
Before gold’s Q1 rally, the asset class had suffered for three years, which Naylor-Leyland attributes to central bankers inferring that the outlook was good for a return to normalisation. “It’s a bit like Pavlov’s dog. The market’s consistently had this bell tinkled in front of it and it dribbles away imagining it’s going to get its lunch and it doesn’t, but at some point the saliva dries up.”
In the equities space, the JP Morgan Natural Resources fund has been “adding a bit of risk and a bit of beta” through some smaller cap holdings, like Oban Mining and Eastern Goldfields, in the first half of this year, according to portfolio manager James Sutton, and Canadian miner Kinross in the large cap space.
Sutton says gold has been the “stand out performer” in the commodities rally this year. “As generalist investors began to see the dollar roll over they became more bullish on commodities, and on gold in particular because it is the most sensitive to dollar weakness,” he says.
Free cashflow has gone from zero or negative to positive as gold prices have shifted from $1,060 an ounce to $1,240 in the first half this year, says Sutton. “Projects can be funded because investors are now willing to give them money. They can raise equity at higher share prices so that equity raises they are doing are less dilutive.”
China, uncertainty in Europe owing to the UK’s vote on Brexit, and US Federal Reserve policy are areas to watch in the year ahead for their impact on gold, says Lowcock. Saunders warns that on a short-term basis gold looks “somewhat over bought”.
“But for the medium term we’re happy with what we’re holding. If inflation was beginning to emerge as a major risk our allocation to gold could be relatively higher.”