Lyon’s £572m closed-ended fund has suffered a difficult 12 months, with the 15 per cent weighting to gold and gold securities being the biggest contributor to losses of 5.7 per cent.However, Lyon (pictured) says that he added to his position in the metal in the spring and autumn of last year, and believes it will come into its own when inflation re-emerges.
“Is this the end of a bear market in gold or a correction in a bull market? Obviously I think it is the latter,” he said. “Central banks began a huge experiment in 2009, and we don’t believe they will be able to exit that policy in a benign manner.”
“Tapering talk last year was the authorities testing the idea of even beginning to exit that policy and all assets fell at that time.”
“The decline in gold this year has been in face of soaring demand in China and India and soaring money printing in Japan. Gold, as money that cannot be printed, should offer us protection.”
“Just because it didn’t work last year doesn’t mean it won’t work in the future.”
“Ultimately inflation will arrive,” he added.
“Japan and the US are monetarising 70 per cent of their issuance, something that wouldn’t have been considered five or six years ago.”
Performance of gold vs equities since Jan 2013
Source: FE Analytics
Data from FE Analytics shows that gold lost 29.59 per cent last year, its worst 12-month period since the US came off the gold standard in the early 1970s.
Lyon bought on the dips in the spring and again in the autumn, and says that the expansion of the money supply will lead to inflation in the fullness of time.
The manager stresses that he only views the metal as a temporary investment and will sell it in favour of equities when value appears in the latter.
“Our view is that it is alternative liquidity,” he said.
Lyon is bearish on the equity market, however, which he says offers little value. This is an important reason why he is holding onto his gold.
The manager points out that equity prices have continued to increase even as earnings growth has stuttered.
Another warning sign is that margin buying – the use of borrowed money to purchase equities – is at record levels in the US. This would exacerbate any market fall, Lyon warns.
“Even in the UK we are returning to a level of investing on the margin we last saw in the 1990s,” he said.
The large number of IPOs from private equity parent companies is another reason to be wary, Lyon argues.
“They say you should feed the ducks when they are quacking. Well, they are definitely quacking,” he said.
Private equity firms are often reputed to be better at timing the top of the market and exiting their investments at good prices for them than the public market is of judging the value of stocks.
Andrew Bell, chief executive of fund of funds Witan Investment Trust, says that he is unconvinced by the arguments in favour of holding gold.
“If you are talking about currency debasement, you could make the same case for gold at $700 an ounce or at $7,000.”“The price ends up being a result of psychological factors. It doesn’t have economic value, it has psychological value.”
Lyon, however, argues that gold can be benchmarked against the monetary base – the number of dollars in circulation – and their purchasing power.
Given the massive expansion in the monetary base in recent years – the Fed’s balance sheet has grown from $1trn in 2008 to $4trn now, he points out, gold is actually undervalued on a relative basis.
It would have to rise to $7,000 an ounce to fully back the US monetary base, he says.
“Gold is cheap when you look at relative valuations,” he said. “In a world of fully priced investments it is one with a little value.”
Lyon traces the current appetite for monetary expansion back to the 1998 crisis when the hedge fund LTCM was saved by the US Federal Reserve and contagion from the Russian default was headed off.
“This led to the start of an era of fixing financial problems at all costs,” he said. “Our view is that there are unanticipated consequences to these actions.”
The manager is also hanging onto a high weighting in index-linkers in anticipation of inflation.
“Index-linkers could be a good investment if we got inflation of 4, 5 or 6 per cent,” he said.
“Index-linkers could do better in that environment.”
Lyon took over the management of Personal Assets Trust exactly five years ago this Monday.
Under his stewardship the portfolio has returned 70.03 per cent as the FTSE All Share has risen 143.95 per cent from the bottom of a bull market.
Performance of trust vs sector and index since Mar 2009
Source: FE Analytics
The trust has a volatility of just 8.92 per cent over that time, compared with the 15.93 per cent of the UK equity market.
The last year has been a tough one, however, with the trust not partaking in the rising equity markets boosted by cyclical stocks. Our data shows that it has lost 5.7 per cent over 12 months compared with the gains of 11.57 per cent made in equity markets.
Performance of trust vs sector and index over 1yr
Source: FE Analytics
The manager recently warned that rising valuations in tech stocks in particular could be the early warning signs of a bubble like that of the early 2000s.
Ongoing charges on the trust are 0.95 per cent, according to the AIC, and it conducts regular buybacks or issues new shares to keep the share price around NAV and eliminate discount risk.
