Investors have been looking to gold as a diversifier since the global sell-off in equities at the end of last year, at a time where there is no obvious asset class to invest in.
Last month German fund selector, Stefan Schrader, told Expert Investor he was looking to buy gold investments as a form of diversification, while SYZ Asset Management’s senior portfolio manager for multi asset, Maurice Harari, told a recent media briefing now was the time for gold as there was no longer much room for real yields to improve and gold was inversely correlated.
According to Morningstar data, gold and general precious metal fund inflows for 2018 were €4.5bn, with a spike in December at €1.5bn. Only three months experienced outflows.
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Source: Morningstar
According to FE Analytics, over the three years to 31 January 2019 the top performing fund, IPConcept Stabilitas Pacific Gold Metals P, returned 90.5%.
This was followed by IPConcept Stabilitas Gold and Resourcen P at 60.4%, Multipartner Sicav Konwave Gold Equity B at 55%, Nestor Gold Fonds B at 48%, and Investec Global Bold C Gr Inc at 45.4%.
The commodity and energy sector average within the FCA Recognised universe was 21% and 9.4% within the Offshore Mutual universe.
Top five gold funds v sector performance for three years to 31 January 2019
Source: FE Analytics
Golden opportunity
Merian Global Investors gold and silver fund manager, Ned Naylor-Leyland, said now was a much more interesting time to be invested in gold than at any point over the past seven years. This was because the gold price reacted in the opposite direction to issues of purchasing power in paper money.
“That promise of normalisation in rate hikes and the unwinding of central bank balance sheets has really gone the way of the dodo recently and that is very significant for gold because gold is about hedging your forward-looking purchasing power issues and generally these things shift in very secular ways,” he said.
He noted that while people were becoming more interested in the asset class there was not much participation yet.
“But because everybody is a momentum investor now, I think that when it happens it will happen rather quickly because of this herd-like behaviour that you see now in respect to all assets,” he said.
Investec Asset Management portfolio manager George Cheveley agreed and said that there was consolidation going on at the moment and mergers and acquisitions were picking up in gold mining companies.
“There will be asset sales out of those companies and obviously that provides opportunity some of the mid caps to pick up some assets out of those companies and this will also spur people to look at further consolidation,” Cheveley said.
“These big mergers will provide opportunity to smaller companies to pick up assets which might not have been run so well within large organisations and then there is the ability for others to look at merging with other companies.
“The good deals in M&A happen early, so they generally seal the most obvious deals first.”
All that glitters is not gold
However, associate portfolio manager at Morningstar Investment Management business unit, Matthias Palowski, said a lot of investors were driven by price and sentiment in gold.
Palowski noted that if investors were looking for protection from inflation they could invest in assets like inflation-linked bonds instead of gold.
“Valuing gold is quite difficult. To value any assets you should use cash flows and you can do that for equities, fixed income, but for gold you don’t receive anything. You’re hoping somebody will buy it off you for a higher price at some point in the future, and that’s speculation not investing,” he said.
“Warren Buffett said there was roughly 170 tonnes of gold out there, that’s roughly three swimming pools, and that’s valued at US$7trn (€6.2trn), and European equities together is roughly $8bn in market cap.
“If you’d ask me what I’d rather buy – companies that produce cash flows, or dividends of 3.5% on $8bn, that is a lot of cashflow for me, or three swimming pools of gold – I know what I’ll take.”
He said that while on the surface gold looked like an asset that was uncorrelated to other markets, the structural fundamental drivers of gold were quite similar to many other assets.
Pitfalls
Neylor-Leyland warned that many investors thought buying physical gold was different to other monetary instruments.
He said that physical gold was a cash instrument and investors tended to allocate small amounts to it “imagining that it would transform into a directional investment in their portfolio and it will not do that. But it does do better than currency”.
He noted another myth was that investors believed that gold was a hedge against inflation but in fact gold hedged real interest rates though it was only half the story.
“For example if inflation was 11% you would say it was a high inflation rate. Now if rates are 14% and inflation is 11%, gold will fall like a proverbial rock and the reason being is that you have 3% positive real return holding cash in the bank So it’s not about inflation on its own, it’s about the relationship between inflation and rates,” he said.
Neylor-Leyland also said Buffett’s view that there was no point in investing in gold because it did not pay any interest was false.
“You can lease and lend gold into the market the same way you can do it with anything, there are plenty of institutions that will borrow your gold and you can generate interest,” he said.
“So that’s just an outright false statement I also can tell you by the way there’s no way that Warren Buffet doesn’t know that.”
Sustainability
On the sustainability side of gold mines, Cheveley said it was no longer acceptable for firms to not talk about it.
He said many gold mines were putting a focus on managing not only carbon emissions but water and general waste management.
“Clearly underground (mining) is more dangerous than an open pit, but you know a number of companies have very good safety records. Now not all of them do and we have to question them to decide if we are going to remain investors depending on how they are going to change,” he said.
He said many firms were looking at solar plants rather than heavy fuel oil plants in remote areas to provide electricity, were involving local government, and interacting with communities to see how they could provide services.
He noted that Investec also engaged with companies, particularly in the mid cap space, on better transparency in reporting.
“We say ‘look you need to be reporting these numbers, you need to be collecting this data and once you’ve collected this data it will be useful to you in terms of cutting your waste and also proving your performance’.”
The top funds mentioned were found using FE Analytics that were domiciled in either Luxembourg or Ireland, was within the FCA Recognised or Offshore Mutual universe, and was available in at least three continental European countries.
