Manager focus: Stephan Müller

Those who see gold as a safe haven in times of crisis or as an inflation hedge recognise only part of its attractiveness, says Stephan Müller, the director of product management and development at Julius Baer.

Thanks to the low correlation of gold with other asset classes, he says, the precious metal provides attractive diversification benefits that are suitable for all-weather portfolios. It can also be used in portfolios to optimise the risk/return profile.

But Müller, who created the Julius Baer Physical Gold fund, says for gold exposure, investors often take on large risks they are not compensated for. With the exception of funds, Müller says, all other instruments entail full issuer risk. If an issuer defaults, the issuer risk falls into the pool of all guaranteed assets in case of liquidation.

Julius Baer’s currency and commodity team therefore adjust the currency versus the dollar for the euro and the Swiss franc share classes on a daily basis. Müller says the purpose of the hedge is maximum participation in the price movement of gold. Distortion is avoided by converting dollar value of gold into the investor’s base currency.

“Clients who invest in gold without currency hedging take on significant currency risks, which detract from the protective function of gold,” Müller says.

The gold price could rise but if, for example, the euro depreciates versus the dollar, investors would lose money. Therefore, the gold fund has got currency hedging for the Swiss franc and euro share classes versus dollar.

The Julius Baer Physical Gold fund invests only in physical gold, primarily in standard 400 ounce bars. Other gold exposure, for example through derivatives, is not allowed. Lending and borrowing are also not allowed.

The fund is fully invested at all times and liquidity is only maintained for the smooth execution of subscriptions and redemptions.

“The gold is physically segregated and stored exclusively in Switzerland in high-security vaults,” Müller says. Aside from the regular payout from the redemption of shares, shareholders of the A-share classes can also ask to be compensated with physical gold.

“Gold is an emotional issue,” he says. “Throughout history, physical gold has always been a means of payment. The gold price is subject to price volatility but it will never lose its physical value and is seen as a hedge against inflation.”

Müller says the value of gold its demand are supported by strong demand for commodities in emerging markets, in particular China and India.

Last year, the strongest demand, about 2,100 tonnes, came from the jewellery industry. Another 760 tonnes were turned into coins and bars. Industry demand, including the dental industry, accounted for a total of 430 tonnes.

Yet, after reaching a peak of 2,654 tonnes in 2001, gold production has been in decline. Müller says lower reserve grades, ore deposits in more challenging geologies, and technological limitations to extraction, are but three reasons that indicate this trend will continue.

According to Müller, all gold ever mined accounts to some 160,000 tonnes— equal to a cube measuring 20 metres on each side. The remaining gold resources, however, are estimated at merely a third of this total.

“Gold will increase in real value in the long-term as production declines. Even with the most recent techniques it is not possible to get more gold out of the ground,” Müller says.

In fact, those economies that have the highest dollar exposure, namely China and America, do something with gold. In April, for example, China increased its gold reserves by 75% since 2003.

The dollar money supply and worldwide inflation tendencies have contributed to the increase in the price of gold. Inflation also leads to devaluation of capital. “There is a potential of more than 100% to the all time high,” Müller forecasts.

Looking back, the price for gold rose over $1,000 per ounce in nominal terms for the first time in March 2008 after hitting a low of £253 per ounce in August 1999. However, he says, the all time high in real terms is at over $2,135 per ounce.

When benchmarked against central bank holdings, he adds, exchange traded funds (ETF) investments in gold already rank sixth. ETFs, together with other investors, demanded 320 tonnes of gold.

The inflows into ETFs have so far continued unabated, even during price corrections. When currencies, for example the Thai baht and the Indian rupee, weakened, the demand of the jewellery industry declined. ETFs, however, still see inflows.

The fund, which Müller says is unique in its approach, is listed on the SIX Swiss Exchange with full transparency intraday liquidity and cost-efficient trading.


Stefanie Eschenbacher was a guest of Julius Baer in Zurich.


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