Gold has fallen out of favour this year with investors keen to take advantage of the strong current run in equities instead. As a result, the gold price has tumbled as investors have pulled money from gold-focussed funds – with the price falling from $1,379 per oz in at its 2014 high of 14 March to $1,275 per oz as of 21 August.
However Investec Asset Management fund manager Scott Winship, who manages the £54m Investec Global Gold fund, expects gold’s fortunes to turn around now before the end of the year and has three specific reasons in mind why this will happen.
Increased geopolitical risk
”Geopolitical tension surrounding the Russia and Ukraine situation tested investors’ risk appetite in the first half of the year and continues to do so”, explains Winship. ”The market has also focused on escalating violence in the Middle East, with particular attention on Iraq.
“The ISIS movement’s domination of Syria, and more recently Iraq, has significant implications for the oil price. The relationship between the gold and oil price exists as oil is a significant input of the world’s activity and hence inflation baskets. Over the long term, the gold price has traded at approximately 16x the oil price. Today that relationship is just shy of 12x and arguably represents value for gold if oil remains at these levels.”
Gold price seasonality
”Seasonality of the gold price has historically led to higher gold demand in the second half of the calendar year and hence better price performance,” says Winship.
”This is because the Indian monsoon/harvest season boosts income and the timing of the Indian wedding season, around Diwali, sees significant quantities of gold purchased as gifts.”
Is inflation entering the system?
”Inflation has long been suggested as a potential consequence of unprecedented money creation by the world’s central banks over the last few months,” says Winship. “There are signs that it may slowly be emerging in 2014 – for example, the annual US inflation rate was up to 2.1 per cent from 2 per cent in April.
“Gold has historically been proven to be an excellent hedge against inflation. Goldman Sachs recently produced research which suggests that there is a 91 per cent correlation between US CPI and US dollar gold price over the past decade. Not only has gold proven its worth as an inflation hedge it has also proven its worth against different asset classes.