Sentiment towards gold from our panel of investment professionals is mixed despite its recent upsurge in price, which has seen the S&P GCSI Gold Spot index provide a return of 20.42 per cent since the start of the year.
Performance of index in 2015
Source: FE Analytics
This significant underperformance of most developed equity markets demonstrates the cautious sentiment of most investors at the moment, who remain bearish following China’s growth slowdown and the collapse in oil price.
Gold hasn’t always been the darling among those who are nervous though. Over the last three years to the end of 2015, the price of gold itself and the FTSE Gold Mines index fell by 30.23 and 64.06 per cent respectively, leading many investors to question how defensive it really is as an asset class.
In an article published at the start of the year, FE Trustnet found that most of the professional investors we asked wouldn’t consider buying into gold because it hadn’t offered any downside protection over recent years.
This has now changed, with Old Mutual Global Investors announcing the launch of a gold and silver fund in March this year, subject to regulatory approval.
“As investors increasingly look for alternatives to diversify their portfolios, now is the perfect time to launch the Old Mutual Gold & Silver fund,” Warren Tonkinson, managing director of Old Mutual Global Investors, said.
ETP provider Source has also just announced that its physical gold investment vehicle - Source Physical Gold P-ETC (SGLD) – saw record demand for its product last month having attracted $300m of new assets.
“We’ve had significant inflows into our product year-to-date, primarily driven by a reaction to the market volatility that we’ve seen since the start of the year,” Christopher Meller, executive director of Source UK Services, said.
“Broadly speaking, I think looking at European-listed physical gold ETPs across the board there’s been about $1bn of net new assets raised.”
“There are two things driving this – one is the reaction to broader volatility and secondly out of the various gold products, the ETP has a very compelling offering with low total cost of ownership and good liquidity in the market.”
One of the major reasons for this trend is the concern that investors are losing faith with central bankers, a trend Psigma’s Tom Becket recently highlighted in a FE Trustnet article.
“Many central banks who have tried to raise rates have had to buckle and change course and there is the obvious risk that the Fed, as shown through its recent tremble, cannot get the confidence to implement tighter policy measures,” Becket said. 
“There is also the chance that investors' faith in central bankers diminishes, which might best be seen through gold's recent rally. I have long maintained that these events make me much more worried about inflation later this decade than deflation, despite others obsessing more about lower prices. The worry is that ultimately central bankers are too successful in their inflationary aims.”
Despite removing all of his gold exposure last year following its unpredictable behaviour, Apollo Multi Asset’s Ryan Hughes (pictured) has become more positive on the asset class over the last month.
While he has no gold holdings as of yet, the manager says that the asset class is now back on the radar for him to start using if there is a pull-back on prices.
“The issue we had last year of course was that when equities were selling off gold was selling off at the same time, which meant it didn’t defend assets at all whereas this time it definitely has defended,” he explained.
“That’s a reassuring sign for getting some pure gold exposure. I think the best way to play it if you want physical gold is through an ETF as it’s the best way to protect yourself in times of volatility when gold behaves as it should.”
Hughes says that investors have the option of turning to gold miners but points out that this adds a further element of risk and might not provide the defensive characteristics investors are looking for from their gold exposure.
In contrast, Hargreave Hale’s Neil Jones has held a modest exposure to gold across most client portfolios for a while, but opts to mostly increase this exposure through gold miners when there is a dip in prices.
“Part of the reason for this approach is to take advantage of some oversold opportunities, but also to achieve some income yield,” he said.
“Of course the downside is having to take on the business risk and often a political risk too, depending on where the companies operate. Of the larger companies, Randgold Resources has been our main focus.”
Performance of stock vs indices in 2016
Source: FE Analytics
Despite believing that having gold exposure is good practice generally, the investment manager says that the price is looking a little high to increase exposure at the moment.
“Ideally, gold exposure won’t be necessary this year, as this will mean good times for equities and the broader economic situation. However, I fear volatility will persist, so I would suggest it is prudent for investors to have some exposure, to help protect portfolios during more difficult times,” he added.
Informed Choice’s Martin Bamford, however, says his clients don’t hold any gold in their portfolios as he believes he can achieve sufficient diversification through mainstream asset classes and points out that gold fails to deliver real returns over the long term.
He also says that, according to World Gold Council figures, the increased demand for physical gold is coming from consumers in India and China, and this demand has offset falling interest in physical gold from western investors.
“Gold is an asset for speculation rather than investment, which is not a comfortable fit with our investment philosophy at Informed Choice,” he said.
“For those who want to speculate over the gold price, exchange traded commodities are probably a better route than buying physical gold. Buying coins or bars can be very expensive in terms of trading costs and commissions, storage and insurance.”
“By contrast, a gold exchange traded commodity is a low cost and fast way to access the asset class. iShares Physical Gold ETC offers a direct investment in the gold spot price with a total expense ratio of 0.25 per cent. Investors receive a return based on a daily movement in the price of gold, rather than the long-term change in value.”
Performance of ECT vs index in 2016
Source: FE Analytics
Chase de Vere’s Patrick Connolly says the decision as to whether to hold gold is less clear-cut and thinks that, while some of the fundamentals (such as demand from sovereign nations and economic certainty) are in place for the asset class to perform well, it remains to be seen whether gold’s bounce-back is sustainable.
“The biggest risks for gold are likely to be a strong US dollar, less demand from India, China and central banks and world peace, as gold is an asset that people often turn to in times of crisis,” he explained.
“Ideally gold is looking for a weak dollar, economic uncertainty and geopolitical risk. All of these are currently possible. So we have a mixed picture, with some characteristics positive for gold and others negative.”
“The current gold price makes it difficult for gold mining companies to operate profitably, although if we do see the gold price continuing to rise, gold shares are likely to rise at a significantly faster rate.”
Connolly adds that Chase de Vere doesn’t recommend any specific allocation to gold for its clients, but says that most investors will have some indirect access to gold and mining shares through holding a balanced and diversified portfolio.
“While the outlook for most asset classes is uncertain, we believe that most investors can achieve enough diversification to spread risks by investing into a range of equity, fixed interest and property holdings,” he continued.
“This is a better approach for those looking for protection than relying on gold, which despite the sporadic hype is very difficult to justify as a safe haven.”
