The manager of the £220m Argonaut European Alpha fund believes gold is a useful inflationary hedge but its current price could only be considered fairly valued in a hyperinflationary situation.The current rate of inflation is at a five-year low of 1.9 per cent, according to the latest consumer price index figures for January 2014.
"There are people who say gold is fantastic and put all their money into it and there are people that say it’s useless," Norris said.
"We take neither of those positions."
"We think gold has its use as an inflation hedge, but gold as an asset class should only deliver the rate of inflation."
"Since inflation is 1 to 2 per cent per year, gold shouldn't be delivering the 15 or 20 per cent per year like it has done over the last 10 years."
"Therefore if we try to calculate the fair value for gold on the basis of what inflation has been for the last 50 years, we come to a price that's 75 per cent down on what it currently is valued at, and we are likely to see a long bear market for gold."
"In order to justify the gold price today, you have to believe in hyperinflation and if hyperinflation doesn't occur then gold is going to be in for a long bear market."
Traditionally seen as a safe haven, both physical gold and gold equities had a poor 12 months in 2013 as investors flooded into equities, causing markets to rally.
Performance of indices in 2013
Source: FE Analytics
According to data from FE Analytics, gold bullion fell almost 30 per cent in 2013, while gold equities fell more than 50 per cent over the same period. However, the prices for both asset classes have rebounded in 2014 after fears over emerging market equities at the beginning of the year made the asset class look desirable again.
Performance of indices in 2014
Source: FE Analytics
According to data from FE Analytics, gold bullion rose 8.64 per cent, while gold equities rose 21.19 per cent over the same period.
FE Alpha Manager Alastair Mundy disagrees with Norris.
In December he told FE Trustnet he was retaining gold exposure as a defensive position against an overvalued equity market and has since increased his position to both gold equities and bullion by 1 percentage point.
“As of 31 December 2013, we had 2.2 per cent in gold shares and 6.35 per cent in physical gold. This position has increased by about 1 percentage point,” he said.
“We have been adding to our position in gold shares and there’s a slight increase in physical gold purely attributable to price movement.”
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
According to data from FE Analytics, Mundy’s Investec Cautious Managed fund has underperformed its sector and benchmark over three years, returning 16.76 per cent compared with 17.04 for its sector and 31.09 per cent for its benchmark.
However, investors should not overlook the part political unrest has traditionally played in gold’s price and volatility and the likelihood it will continue to do so in the near future, according to Adrian Ash, head of research at BullionVault.
"Yesterday [Sunday] was the busiest Sunday on BullionVault's live 24/7 orderboard since August. Back then, an escalation in the Syrian crisis was widely blamed for a rally in gold prices which had in fact begun two months earlier."
"Syria never in truth drove a spike in precious metals. Gold’s current jump is, however, very much in line with 2014's uptrend so far."
"Its sudden war premium of $20 per ounce looks tame given the jaw-jaw from Moscow and Washington. Here's hoping it proves more over-priced still."
"Also important to bear in mind are recent events in China. Investors and savers in the world's No.1 gold-buying nation are no doubt anxious about Ukraine, but Chinese households have got other concerns closer to home as well."
"This weekend saw a terrorist knife attack in south-west China; Beijing attempted to keep a lid on that awful news. This morning's sudden three-month high in trading volumes on the Shanghai gold exchange might suggest it failed.”
Gold rallied to its highest level since October today, hitting $1,353.10 an ounce after concerns over the military stand-off in Ukraine’s Crimean peninsula which saw Russia take effective control of the region over the weekend.
City Financial’s Mark Harris told FE Trustnet in an interview last week that despite going back into gold in December, he had already sold back out and taken profits of 20 to 22 per cent.
This is because the fund of funds manager expects the gold price to underperform in the short-term because the price is inversely correlated to equity markets, but has said he is ready to go back into the asset class sooner rather than later.
