Gold and silver are now 26 per cent and 55 per cent off their respective 2011 highs of $1,897 and $48 per ounce. While some high-profile fund managers – namely Jupiter’s John Chatfeild-Roberts and Troy’s Sebastian Lyon – see the most recent fall in the price as a buying opportunity, Norris thinks there could be more pain to come. "Gold today looks like the ultimate high-risk, low-reward investment, rather than the commonly portrayed low-risk, high-reward investment," said Norris (pictured), manager of the five crown-rated IM Argonaut European Alpha fund.
"The most remarkable aspect of this new bear market is the bewildering absence of an accepted narrative that might serve as an explanation, not least as central banks have become bolder in their policy actions since 2011."
"We would urge caution in the face of a consensual view that suggests that the precious metals may have experienced nothing more than a technical setback."
"We believe there is worse to come for gold, gold miners and gold bugs, particularly if the US economy continues to recover at its current pace."
Performance of indices over 3yrs
Source: FE Analytics
Norris refers to gold as "the world’s laziest investment" and thinks an obsession with the culture surrounding it is leading investors down a blind alley.
"There is simply no price at which gold enthusiasts wouldn’t rather buy more than sell, despite all reasonable attempts to value gold pointing to its chronic overvaluation," he said.
He adds that many of the supposed reasons for investing in gold are flawed, especially the idea that it is an effective hedge against inflation.
"Gold has served well as a store of value over many centuries, but recent returns have disconnected from inflation, as the statistics show," he explained.
"Since 1968, when the fixed $35 peg was replaced with a private market, the US consumer price index of core inflation has risen 584 per cent; over the same period gold has risen from $35.2 per ounce to $1,400, or 3,867 per cent."
"If gold was fairly valued and a perfect hedge against inflation in 1968, and its price increased in line with inflation since then, its fair price today would be $240, which is just 17 per cent of its current price."
"The deviation between gold’s current price of $1,400 and its intrinsic inflation-adjusted fair value of $240 could be categorised as an old-fashioned tulip mania asset bubble," he added.
FE only has data going back to June 1999. Since then the gold price is up 439.23 per cent, while the UK and US consumer price indices are up 35.96 and 47.88 per cent, respectively.
Performance of indices since June 1999
Source: FE Analytics
Norris points to the growing strength of the US dollar, which is typically inversely correlated to gold, as another potential headwind for the precious metal.
The manager is even more bearish on gold equities. He says that falling profit margins and the ailing gold price could see the sector become an all-out loss-maker before long.
"In most cases, analyst profit forecasts are still using a gold price of $1,500, which means that the average gold miner selling gold at $1,400 will see profits downgraded by around a third and that the gold mining industry is only a further 15 per cent fall in the gold price away from being unprofitable as a whole and hemorrhaging cash," he said.
"With limited gearing to gold-price upside, and asymmetrical downside, owning gold mining equities is a particularly unappealing trade."
Norris says the valuation differential between gold and the equity market in general is hugely appealing.
"The year 2000 saw equities at their most expensive relative to gold, with the price of the European equity index six times the price of gold – a good time to sell equities and buy gold," he said.
"Today the same ratio is just one to one. That is not quite as cheap as European equities traded relative to gold in 1980, but it does suggest that gold is today far too expensive to be a useful inflation hedge."
Norris’s IM Argonaut European Alpha fund is a top-decile performer in the IMA Europe ex UK sector since its launch in May 2005, with returns of 133.74 per cent. It has also comfortably beaten its benchmark over the period.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund requires a minimum investment of £500 and has an ongoing charges figure (OCF) of 1.81 per cent.
Norris also heads up the IM Argonaut European Absolute Return fund, which aims to beat cash and inflation.
It has returned 30.73 per cent since its launch in 2009, more than doubling the UK consumer price index in the process. It has delivered a positive return in every calendar year since inception.
The fund has short positions in gold miners Fresnillo, Randgold Resources and Hochschild Mining, which has contributed to the fund’s strong performance year-to-date.
