Following last year’s market volatility, it’s likely that many investors will be looking to increase the level of downside protection in their portfolios as we head into the New Year.
One asset traditionally known to be a ‘safe haven’ is gold, but as investors will no doubt know, it has been anything but a ‘safe’ place to store your money over recent years. According to FE Analytics, the price of gold has fallen by 20.77 per cent since the start of 2011 while the FTSE Gold Mines index, which is seen as a higher beta play on the precious metal, has lost 74.71 per cent.
Performance of indices over 5yrs
Source: FE Analytics
Following a decade long bull-run in the asset class, the price of gold reached its peak at $1,900 in August 2011. Now, it stands at just $1,077.
This is partially the result of the strong US dollar, which has historically shown an inverse correlation with the price of gold over the years, plus the fact that inflation has remained very low and it offers no yield whatsoever
Seeing as gold’s performance has continued to fall over recent years though, does this mean that an opportunity for buying into the asset class has now finally opened up? 
Ryan Hughes (pictured), fund manager at Apollo Multi Asset Management, says the firm removed all of its gold exposure last year when its price fell during the Greek crisis as its behaviour became unpredictable. This, he argues, doesn’t look set to change any time soon given the headwinds facing gold at the moment, and as such, he’d prefer to hold cash as a diversifier instead.
“For 2016, there looks to be a continued headwind from the strong US dollar that could certainly keep the gold price depressed while a continued slowdown in China is also likely to act as a headwind,” he said.
“Traditionally, gold should act as a safe haven in times of turmoil but time and again through 2015, gold failed to live up to this billing and didn’t protect capital during the numerous sell-offs that occurred.”
“With this backdrop, it's hard to build a strong buy case for gold for 2016. Gold mining equities may be slightly different, simply on the basis of valuation. Many of these companies are trading at significant discounts and it may not take much stabilisation in the gold price to see the equities have a rally, but this would only be for the brave at this time.”
Neil Shillito, director of SG Wealth Management, agrees that there is no case to buy into the asset at this time and as such, he is not looking to increase his exposure at the moment.
“With QE programmes still strong in both Europe and Japan and interest rates still very low (despite the Fed’s decision in December and don’t forget it’s just as probable that rates will come down again rather than rise), I’m struggling to understand why anyone should buy gold when yields of 3-4 per cent are available from other asset classes which one can buy with ‘free’ money,” he said.
While gold has seen a significant fall from grace over the last few years, Chase de Vere’s Patrick Connolly points out that sharp fluctuations in the asset class’s price are nothing new, as it typically endures periods where it rises or falls rapidly in between longer periods where is does very little at all.
“Whether now is a good time to buy gold is a very difficult question to answer,” he admitted. “Some of the fundamentals are certainly in place for gold to perform well. There is continued demand from sovereign nations, there is uncertainty surrounding much of the global economy, significant geopolitical risks and the outlook for other assets is very mixed.”
“Gold shares are trading at a big discount, although these companies still have some serious challenges. Foremost amongst these is that it is getting harder to access gold with new supplies perhaps a mile underground meaning that production costs are increasing as new gold becomes scarcer. Higher production costs at a time when the gold price is depressed doesn’t result in profitable gold mining companies.”
“However, gold shares are cheap and sentiment toward them is incredibly negative. It is often at such times that, for the brave investor, the best buying opportunities emerge.”
According to FE Analytics, for example, the average gold fund in the Investment Association universe has lost money in each of the last five calendar years. In four of those years (the exception being 2014) those have been double digit losses.
Source: FE Analytics
From a macro perspective, Connolly says that the biggest blows to gold in 2016 would be the continuation of a strong US dollar, less demand from India and China, and improved global relations as gold is an asset that people often turn to in times of crisis.
However, he says that some investors will already have exposure to gold simply through holding a balanced and diversified portfolio and therefore don’t need to consider increasing their exposure to the asset class.
“For those who want specific exposure to gold then an allocation of around 5 per cent or less is probably sensible,” he added.
While many investors remain cautious on the asset class, there are some that have increased their exposure recently as a result of its continuous price fall.
Not only this, Tilney Bestinvest’s Jason Hollands says there are also a number of potential tailwinds on the horizon for gold, one of which being the potential loss in confidence in central banks if quantitative easing (QE) becomes discredited as a policy response.
He says that this is a possibility in 2016 given the fact that growth is slowing globally, and that it could lead to countries vying to gain a competitive advantage.
“With central banks having pulled all the stops out in terms of loose monetary policy, but global growth looking very fragile as China slows, there is a scenario where there is a stampede out of risk assets and a loss of faith in central banks, which could see a resurgence in gold as the premiere panic asset,” he explained.
Having not held gold for some time, Tilney Bestinvest added a small exposure to physical gold at the end of last year through ETFS Physical Gold GBP, an exchange-traded commodity fund, within its multi-asset portfolio in case of a renewed currency war.
“There is a risk that China might seek to further devalue the yuan to make its exports more competitive and with both the ECB and Bank of Japan way off their inflation-targets, additional QE in these regions can’t be ruled out either,” Hollands warned.
“Gold equities should be viewed as a geared exposure to the gold price, so are very high risk and might be considered only if you are a convinced gold bull. This is because extraction costs are high, so even modest movements in the underlying price of gold can make a big difference between losses and profits.
“Given the terrible run for gold, there has been a fair degree of serious restructuring within the gold mining sector, which might translate into high rates of profitability should gold prices lift.”
Neil Jones, investment manager at Hargreave Hale, argues that the price of gold seems to have stabilised over recent months and has been showing signs of recovery.
Performance of gold price over 10yrs
Source: FE Analytics
As with Hollands, he believes that the persistence of economic uncertainty could lead to gold falling back into favour once more, especially due to the fact that it has sold off so significantly.
“We have a modest exposure to gold for most clients, but we are likely to start increasing this over the course of the year if we see some upward momentum in the price,” he said.
“In general terms, I think it is sensible to maintain well-diversified portfolios and I would include some gold exposure in this. With prices at these levels it could once more become attractive as a safe haven asset.”
