As of Thursday afternoon, gold was down another $5 to $1,253 per troy ounce and was on course for its lowest close since February.
The precious metal saw a brief bounce from the start of the year to mid-March, picking up 14.26 per cent, but has seen a protracted decline since. In spite of strong gains in the first quarter, the S&P Gold Spot index is only up 3.87 per cent year-to-date. This means gold is still trading near its lowest level in the last four years.
Year-to-date performance of index
Source: FE Analytics
But Chris Mayo (pictured), investment director at Wellian Investment Solutions, says there’s not enough visibility on where the gold price is going to think about topping up now, in spite of the fact that the precious metal is cheap relative to history.
“We think there is a floor at $1,200 and a top around $1,400 and it’s been bouncing around between that for the last year or so,” he said. “If it goes below $1,200, it could go quite a bit lower. If it breaks through $1,400, there could be a bit more upside.” Justin Oliver, investment director at Canaccord Genuity Wealth agrees and warns that the relative stability of gold over the last year is likely a short-term phenomenon.
“It has been noticeable that gold has been stuck within trading range of $1200 - $1400 per ounce for the past year and has been even less volatile since mid-April,” he said.
“This relative lack of volatility is quite rare, and will not likely persist for much longer.”
But Oliver says investors may do well to buy into gold mining stocks, which have been battered for some time.
“Gold mining profits should increase moving forward, even if gold prices remain flat and with declining downward momentum and extreme investor pessimism, there is certainly potential for gold mining shares to push higher from here.”
Funds like BlackRock Gold & General, Smith & Williamson Global Gold & Resources and the BlackRock World Mining trust all offer investors exposure to this sector.
“That said, the outlook for gold does not appear particularly encouraging,” he warned.
He adds that the precious metal itself doesn’t have the same capital protecting qualities it did in the past – going so far as to say it isn’t as likely to protect should markets fall.
“Gold is likely to face fundamental headwinds in the form of Fed (US Federal Reserve) normalisation, higher real interest rates and a firm dollar.”
“The one major reason for holding gold is to hedge against an increase in geopolitical concerns, as it will not necessarily protect value in the event of a setback in equity markets.”
“However, this does partly depend on the catalyst which sparks any equity market retreat. If such a pull-back is predicated on increased expectations of Fed tightening, then gold will likely perform poorly – if any setback is due to heightened geopolitical concerns, then gold should protect value well and add a level of diversification.”
“Certainly, gold mining shares have most often displayed little or negative correlation to broader equity markets,” he added.
Oliver (pictured) points out that the FTSE/JSE Africa Gold Mining index has a negative correlation of 0.028 to the S&P 500 over the past year.
However, he notes that correlations do change over time and these figures may be due to the fact that the sector endured such a torrid time during 2013 as the wider equity rallied. “We are not holding gold or gold miners within our portfolios at this moment in time and while there are reasons for expecting gold mining shares to deliver attractive returns moving forward, we will likely wait until we have greater conviction before considering establishing a position,” he said.
Performance of gold and gold miners over 3yrs
Source: FE Analytics
Whether gold still deserves its safe haven status is arguable, but star managers like Troy’s Sebastian Lyon and the Ruffer Investment Company’s Steve Russell and Hamish Baillie are hanging onto their gold in what they view as potentially tumultuous markets.
John Langrish, portfolio manager at James Hambro, says while gold has a place in a well-diversified portfolio investors shouldn’t go overboard, even if they are bearish.
“We are not gold bugs. We don’t believe there is a need to have a huge proportion of wealth in gold because there is an impending collapse of currencies, but we do have some exposure as an insurance policy against a worst case scenario,” he said.
“Gold tends to have a negative correlation to the dollar, and has in the past protected against spikes in inflation.”
Langrish says that the cult status of gold can cloud investors’ judgement. When running family portfolios earlier on in his career, he says a number of clients would ask him to present them with bullion deposits so that they could physically touch them. Such an emotional tie to an investment can be dangerous, he argues.
“It has an almost mystical feeling of perpetual worth for some people,” he said. “I think this goes back to memories of hyperinflation, when people have seen just how quickly cash can lose its value.”
“In 2008 when there were genuine fears that the banking system was going to collapse, it’s understandable that it was high in demand, but because there is now a search for yield – and gold doesn’t yield anything – it has lost its lustre.”
However, Langrish says gold’s tendency to do well in the aftermath of black swan events makes it a good diversification tool, adding that it is likely to provide some protection if inflation does indeed kick in.
Referring to QE, he said: “My view is that if you throw enough damp logs on a fire, eventually one is going to catch fire. It looks like Europe is going to start its own version.”
