Gold is looking particularly attractive as an asset class due to QE-induced ‘zombie’ companies, Trump-related uncertainty and the global inflationary backdrop, according to several global and multi-asset fund managers. However, others argue that the eight-year gold bull run has run its course.
Bullish manager comments come despite widespread belief that the US dollar will rally off the back of Trump’s proposed fiscal expansion policies which, historically, tends to spell bad news for the yellow metal.
Gold equities are renowned for being volatile as their performance is largely dependent on macroeconomic events and cycle positioning.
Over five years, for instance, the S&P GSCI Gold Spot index has a maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 36.97 per cent while the MSCI World index’s drawdown is less than a third of that over the same time frame.
Performance of indices over 5yrs
Source: FE Analytics
As such, it is notoriously difficult to call the right and wrong times to increase exposure to gold, especially when there is so much geopolitical uncertainty in the US.
However, a number of investment professionals believe now is a particularly prudent time to hold onto the asset class.
Marcus Brookes, head of multi-manager at Schroders, said: “We began to get more positive on gold-related equities in the third quarter to 2015, driven by the significant bear market that many of these companies had experienced from 2010 and what looked like an attractive entry point at the time. As a result we added to our position in a gold equity fund.
“We then added further to the position over the summer as we believed that many investors had taken a significantly skewed position for a deflationary backdrop – the secular stagnation argument being so widespread – and away from the more ‘value’ areas of markets such as gold equity.
“In our eyes, inflation expectations were too low and any signs of inflation were due to benefit the more value-orientated areas of markets.”
Despite the gold price falling during the second half of 2016 due to improved investor sentiment, the manager still believes gold is a valuable asset to hold given expectations for rising inflation.
“Inflation expectations are now relatively well-established and whilst there are various factors to unravel over the course of 2017 – how the US dollar fares and the extent of Donald Trump's fiscal measures, to name a couple – we expect it to remain an important part of our portfolios in what could prove to be a tricky year,” he added.
Ben Conway, co-manager of the Hawksmoor Vanbrugh and Distribution funds, has been positive on gold for a long time and believes gold mining shares are particularly attractive in the current environment.
The team continues to believe that quantitative easing has demeaned the value of fiat money and warns the subsequent impact could be felt for years from now.
“From the way that inefficient poorly-run companies have been allowed to survive thanks to cheap access to capital, to the artificial manipulation of yield curves and the knock-on impact to both investor and consumer behaviour, the impact of these policies is probably still poorly understood,” Conway said.
“While QE has yet to cause significant final goods price inflation, it has clearly caused significant financial asset price inflation. Holding gold is the only way to express a diminution of credibility in central bank policy.
“As an ultimate store of value – that paper money lacks thanks to the excessive printing of it – it should perform well as confidence is lost in the fiat monetary system and central banks in general. Gold should perform well under a multitude of scenarios, but certainly as real yields fall.”
The team at Hawksmoor also sees gold as a more attractively-valued hedge against further falls in real yields than inflation-linked bonds.
Conway admits gold – and gold mining shares in particular – can be volatile and, as such, the team limits exposure within their funds.
It has recently been increasing exposure to Ned Neylor Leyland’s $148.9m Old Mutual Gold and Silver fund, which holds a combination of gold and silver bullion alongside a portfolio of mining companies’ shares.
The Ireland-domiciled fund was launched in March 2016 and, since then, it has returned 46.97 per cent with a maximum drawdown of 19.54 per cent.
Performance of fund since launch
Source: FE Analytics
“[Leyland] will vary the weightings to bullion versus equities according to his bullishness on the asset class,” Conway added. “The fund remains of a size that allows him to be nimble and invest in the very best opportunities.”
James Butterfill, head of research and investment strategy at ETF Securities, is cautious on US equities and the US dollar, despite positive market reactions to the election of Trump as US president.
As such, he believes gold equities remain a good means of downside protection and asset diversification as we head through 2017.
“I think what surprised us was that the markets were giving Trump the benefit of the doubt in terms of his ability to enact tax cuts, infrastructure spending and repeal the Affordable Care Act,” he said.
“What we’re finding this year is that Donald Trump is a deal-maker but he’s not necessarily a politician, and that’s certainly evidential in the Affordable Care Act where he is struggling. This is clearly a test for his ability to enact tax reforms and he’s stumbled. He hasn’t managed to bring the Republican party together.
“We see a lot of earnings disappointment in coming quarters where we don’t see these tax cuts materialise in a timely manner, and that should weigh on US equities.”
Butterfill says the “cleanest” hedge against this is gold equities, although the firm also has exposure to gold miner ETFs.
“Ultimately, if you buy the gold miners, the idea is that a rising gold price will really boost margins, but, on the flipside of that, they’ve been massively cutting back on capex,” he explained.
“We do feel that, actually, that supply-side squeeze will probably hurt more in the longer run than the rise in commodity prices will benefit them. That’s why we prefer gold over gold miners.”
Not everybody thinks now is the time to go for gold, though. Paul O’Connor, head of multi-asset at Henderson, believes the post-crisis bull market in gold is now looking fatigued.
Performance of index since 2008
Source: FE Analytics
“Gold performs best when real interest rates are falling and when financial stress is elevated but we don’t see either of these being an enduring feature of the world in 2017,” he explained.
“We have a fairly constructive view of the global economy that sees real interest rates grinding higher and cyclical assets outperforming more defensive assets, like gold.
“Gold performed a great role as a Brexit-hedge in our portfolios last year - we reduced holdings into the strength as we rebuilt positions in more cyclical commodities. Our funds do still have a few per cent in gold but that’s as a hedge against unknown unknowns, rather than an asset that reflects our core view of the world.”
Anthony Rayner, multi-asset manager at Miton, says he is always interested in diversifying portfolios regardless of how positive he is on the macroeconomic backdrop and therefore holds just under 5 per cent in gold in his defensive strategy.
“Gold can provide some diversity to our multi asset portfolios, especially when the status of other ‘safe haven’ assets is under question, such as long-dated core government bonds, which are muddied by massive central bank manipulation and incredibly low yields, so providing a minimal buffer,” he said.
“There has been some decent momentum to gold this year and we are happy to maintain our positions but, at the end of the day, we are pragmatists and if it starts to lose momentum, or indeed not behave like a safe haven, we will reconsider our exposure.”