Having been one of the top performing asset classes over the last decade due to its so-called “safe-haven” characteristics, the price of gold has trended downwards over recent years. While it has since stabilised, its fall in price has burnt vast swathes of investors.
However Stewart (pictured), manager of the £9bn Newton Real Return, says investors should not give up on the precious metal and it should always be part of a well-diversified investment portfolio.
One of the major reasons, and the reason why he holds 3 per cent of his portfolio in a gold ETF, is due to the possible impact of recent currency wars as countries have tried to debase their currency in the hope of boosting domestic demand and economic growth. “We are in the largest collective debasement the world has ever seen, it is a bit of an experiment,” Stewart explained.
“It’s been going on for decades but they are really testing it to destruction as there has been competitive devaluation going on across the globe.”
“That puts pressure on the emerging world and currencies in general, so we have to think carefully about which currencies we want to be in.”
“We think of a commodity like gold as a good currency to be in in this environment.”
“However, it has been quite a high profile theme for the [Newton] Real Return strategy as we have decent exposure to it. It was a good thing to own through the crises and beyond, but over the past 18 months or so it has not been a good thing to own, in fact, it has been quite horrific.”
According to FE Analytics, investors in physical gold would have seen a return of 252.66 per cent over 10 years while, as a point of comparison, the FTSE All Share has returned 126.95 per cent over that time.
Performance of indices over 10yrs
Source: FE Analytics
However, as the graph above demonstrates, the gold price has fallen significantly over recent years.
Experts have given many explanations for why that has been the case. However, most agree that the gold price has fallen because the possibility of sovereign default and the threat of hyper-inflation have both subsided.
The fact that investors haven’t been as risk-averse and as gold doesn’t offer a yield have also contributed.
All told, our data shows that investors would have lost more than 20 per cent if they bought the precious metal two years ago. Currently, the gold price stands at $1,309.
Performance of indices over 2yrs
Source: FE Analytics
However, like Troy’s Sebastian Lyon, Stewart warns investors that just because and inflation, as a result of mass-intervention from the world’s central banks, hasn’t happened yet, it doesn’t mean it won’t happen in the future.
“I know a lot of people can’t understand why you would own gold, but if you lived in Turkey, South Africa or even the UK in the 1970s, you know pretty quickly that your currency is falling and you’ve probably got capital controls, or they might be imminent, and therefore owning something that takes you out of that monetary system makes a lot of sense.”
“By completely ignoring something like gold, you are basically saying that it’s not going to happen to me or I can’t see anything like that ever happening. But I remember when there were capital controls,” he added.
Alastair Mundy (pictured) also holds a large percentage of his £2.8bn Investec Cautious Managed fund in physical gold.
While he doesn’t hold it as a hedge against inflation per se, Mundy says it should be used as a form of protection against central bank incompetence and investor euphoria; both of which he says are prominent in the current environment. “We bought a little bit more gold at the back end of last year. We are not using it as a hedge, so we aren’t saying that if equities fall significantly then gold is guaranteed to go up; gold certainly isn’t that perfect a hedge.”
“We just think it is a very important asset class to be holding onto in a diversified portfolio, especially in times like this where we think investors are really understating the importance of tail-risks in a portfolio.”
“There is this belief that we are going to muddle through no matter what, and investors aren’t pricing in, not impossible eventualities, like the chance of deflation, inflation or governments going bust.”
“They just got their fingers in their ears, singing their song and pretending that nothing is going to happen. “We think that the tails are a lot fatter than investors believe.”
Both Stewart’s Newton Real Return fund and Mundy’s Investec Cautious Managed have been negatively impacted by having high weighting to gold and other so-called defensive assets. While equities returned 20 per cent last year, both of their portfolios returned around 7 per cent.
Performance of funds vs index in 2013
Source: FE Analytics
While Stewart is holding gold, and other safe-haven assets, as he is concerned about the outlook for financial markets, he says long-term investors will be rewarded for holding the precious metal.
He refers back to a recent piece of news whereby a couple in a California discovered tins of gold coins from the 19th Century. While the face value of those coins was only $28,000, their current value was $10m
“That doesn’t really tell you very much about what the price of gold is going to be at any point, but what you do know is that over time the further out you go, the probability that it will maintain its purchasing power increases – which is the opposite to most nominal assets,” Stewart said.
“That has been the case. It is very difficult to know what the gold price is going to be tomorrow and you have no idea what it is going to be over the next five years. However, in a couple of 100 years’ time you are going to know that there isn’t going to be much more gold left in the world but there is going to be a lot more money.”
