Gold can play a multi-faceted role in investment portfolios - not least as a hedge against inflation - so here Gill Hutchison picks out a couple of multi-asset funds with long-held exposure to the precious metal
Gold and gold-related equities are structural features of a number of popular managed funds as this most familiar of commodities can play a multi-faceted role in investment portfolios.
Most obviously, it remains one of the most enduring safe havens. Are you worried about a new military conflict? Hold some gold. Are you concerned that President Trump's policies will cause economic mayhem? Hold some gold. Do you think equity markets are vulnerable? Hold some gold.
That said, gold does not always behave as it should - its price still matters (fortunately). We saw this after the gold price peaked in September 2011 at an overinflated price of around $1,900 (£1,556) per ounce. Thereafter, it was an unrewarding component of investment portfolios, even though the world had its fair share of economic and political crises, including the eurozone financial mess, the Ukrainian conflict and the rise of ISIS.
Apart from its elevated price, there were other logical reasons for gold to be out-of-favour. One of these was investors' hunt for yield, whereby income-generating instruments held more lustre than a non-yielding investment such as gold.
Another key factor in gold's falling price was the inflationary - or should we say disinflationary - picture. Subdued economic growth in recent years has occurred at a time of global deflationary forces, a rising debt mountain and a cyclical downturn in emerging market economies. This set of circumstances is not supportive of the gold price, given its inflation-hedging attributes (unless, of course we have a deflationary bust, in which case gold would be the only game in town - but let's not go there).
The gold price bottomed in December 2015 at just over $1,000 per ounce and set off on a strong rally during the first half of 2016. Gold miners, whose share prices had been utterly appalling, bounced strongly on the back of the rising commodity price. The recovery ran out of steam mid-year, however, as reflationary optimism replaced deflationary gloom and US treasury yields finally began to move upwards.
Gold's behaviour since Donald Trump's election success has been interesting. Having fallen going into the election, the price has been rising since mid-December, even as economic data has been coming through relatively strongly and rhetoric from the US Federal Reserve has - mostly - confirmed further interest rate rises are in the offing, regardless of President Trump's tax and spending plans.
Typically, of course, the prospect of juicier yields from government bonds and a stronger US dollar would divert attention away from gold, but clearly other factors are at play …
Reflation … inflation?
A persistent uptick in inflation would clearly bolster the case for the metal. At present, equity markets are betting upon a supportive reflationary environment - a view that is reflected in US markets edging to fresh highs on an almost daily basis. If the reflationary conditions develop into an environment that is increasingly inflationary, we can expect the gold price to respond in kind.
We can see evidence of this type of behaviour if we look back to the reflation of the 1950s, which gave way to the inflation of the 1960s, when interest rates trended higher and equities entered a secular bear market. After the US abandoned the gold standard in 1971, the gold price made up for lost time and moved aggressively higher. While we do not have the same pressure-cooker situation today for the gold price, this past pattern of behaviour is instructive.
The case for gold strengthens in circumstances when the rise in bond yields lags the improvement in GDP growth - a scenario we can see playing out today. As inflation is rising, real interest rates are falling. At the same time, growth-focused central bankers are reluctant to raise rates too quickly - in any case, their ability to act is curtailed by the world's reliance upon low interest rates to finance its sky-high debt burden.
Add some fiscal stimulus to a US economy that is pretty much fully employed and - hey presto - the inflation genie could be well and truly out of the bottle. Such circumstances are no picnic for bonds or equities, but here, gold may well prove its worth.
Strategic gold holdings
Investec Cautious Managed (IA Mixed Investment 20-60% Shares sector) and Newton Real Return (IA Targeted Absolute Return sector) - both ‘Recommended' funds within The Adviser Centre - have long-held positions in gold and in gold-related securities.
Investec Cautious Managed currently has around 10% in physical gold and silver, plus some holdings in precious metal miners. Manager Alastair Mundy has been highly sceptical of unconventional monetary policies and the impact of money-printing upon currency values and inflation. Gold has been one of his portfolio insurance policies.
Iain Stewart, manager of Newton Real Return, has had similar qualms about currency debasement as a result of quantitative easing policies. The fund has around 10% allocated to precious metals within its "stabilising and hedging positions" component.
The team at Newton points out gold is an asset that cannot be printed or created - hence its enduring safe-haven qualities and its role in protecting portfolios against paper currency devaluations. They put forward the idea nation states are still rather keen on holding gold as part of their strategic reserves, so it might just be a good idea for long-term savers to do the same!
The gold price is volatile and vulnerable to swings in investor sentiment, so it is not necessarily a holding for the faint-hearted - Messrs Mundy and Stewart can tell you all about that. If you are looking for an investment that can move up in price when other assets are suffering an inflationary swoon, however, there is a good chance that gold is the answer.
Gill Hutchison is research director at The Adviser Centre. To access the firm's free-to-air fund research and consultancy service, please click here.
The Adviser Centre will also be presenting at Professional Adviser's Multi-Asset Roadshow, which visits Birmingham, Bristol, Harrogate, London and Manchester between 25 April and 4 May 2017.
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