We see gold as a non-yielding real asset that should act like a safe-haven currency, and don’t believe it should be grouped together with other commodities that are consumed to create economic activity.
It is the very fact that gold is not used like other commodities, but that it accumulates gradually over time without degrading, that lends it the ability to be of use as a monetary unit. It is gold’s low and stable production growth when compared to paper money that confers some ability to appreciate over time.
As we enter into increasingly untried and extreme monetary policy measures, we continue to feel that allocating a certain proportion of our clients’ money to an asset which cannot be printed or created, remains the right thing to do.
Furthermore, as we see increasingly negative interest rates across vast swathes of global bond markets, the once common argument against gold, (the opportunity cost of holding a non-yielding asset) loses credence.
The strategy’s allocation to the precious metal has, along with our exposure to a basket of defensive equities and government bonds, been one of the main beneficiaries of the current uncertainty in markets.
Gold made up 11.2 per cent of the Newton Real Return sterling strategy at the end of August, near the top of its historical range.
Within the listed gold miners, exposure to gold companies is currently split between three large cap miners, (2 per cent), and 13 or so small cap miners (3.5 pr cent). We also have 6.7 per cent gold directly held through ETCs (exchange traded commodity).
Prior to 2008, gold played a less meaningful part in the portfolio, but our subsequent exposure has been a response to the ever more radical monetary policy sparked by the global financial crisis.
In absolute terms, the strategy’s gold exposure has been higher. In August 2010, the weighting was around 14 per cent (again, in the sterling strategy). However, the current weighting is the highest in relative terms, as the fund has grown over that timeframe, and exposure has also risen in line with strong performance by gold equities over the first half of this year.
Our relatively high gold exposure is one indication that we are as cautiously positioned now as in 2008, although at that time, we were faced with bond yields much higher than we see today and the cost of protecting your portfolio was cheaper.
Now, we are presented with less levers to pull, in terms of indirect protection, as all asset classes have been to an extent distorted by monetary policy. We were, for example, significantly more short on sterling in 2008, owing to the differing nature of the problems we saw unfolding.
Our caution now lies around the fact we believe it is very abnormal for financial markets to have this much confidence in central banks. Central bank policy is driving markets and keeping asset prices high but this could all break down as it is stretching fiat currency to its limit.
We will continue to hold gold, as we have growing concerns over the liquidity of credit markets due to the migration from government bonds into riskier fixed income assets and we expect to see further earnings weakness coming through.
Up to now, the market has been complacent on high yield bonds, as the abnormal monetary policy has kept default rates low. If you factor in a more normal environment, we could see a rise in default rates at the back end of the cycle.
In an environment of increasing paper currency devaluation, debasement and volatility, denominating a portion of our clients’ portfolios in a monetary asset that is outside the current credit-driven financial system can ultimately make sense as a method of diversification.
It’s worth remembering that although gold is no longer used to back currencies, nation-states continue to hold gold as part of their reserves as a long term financial ‘insurance’. It doesn’t seem unreasonable for savers to do the same.
Suzanne Hutchins runs the Newton Real Return fund.