The price of gold has plummeted this year, down 9.8 per cent, according to FE data. It hit a low of $1,395 in April, but has since recovered to $1,455 at the time of writing.
Performance of gold over 10yrs
Source: FE Analytics
Although Markova, manager of Smith & Williamson Global Gold & Resources, says she was taken aback by such a dramatic correction in the gold price, she believes the uncertainty surrounding the global recovery, and inevitability of inflation, will push it higher in the near future.
"The outlook for gold depends on your point of view of the markets," she said. "By looking at the S&P 500 having gone upwards, you could think that the crisis is over and now is the time to just hold equities." "However, issues like Cyprus show that there are still headwinds out there."
The manager says she expects a weakening in the "overvalued" US dollar and a move to a more inflationary environment in developed economies.
"The question is: how are governments going to deal with the sovereign debt crisis? And also, how are we as investors going to preserve our wealth?"
"More investors should realise that gold is an asset that can stand the test of time, despite short-term volatility."
"We think that as issues such as very high unemployment remain, gold as an asset class should do well. Although we haven’t seen inflation yet, policy makers are pushing us towards it so the price of gold will start running when the price of money drops."
"The US dollar has provided a headwind for gold investors as it is a competitive currency at the moment but it is being debased."
"Other currencies are being de-based around it and though it may take some time, the US wants a weak dollar to encourage its manufacturing and exporters so the government will continue to manipulate the dollar."
"Generally speaking, the historical trend is that when the dollar goes down the price of gold goes up."
"That’s why central banks have been buying bullion, because they don’t want to hold dollar-denominated assets, because they believe the price will fall."
The manager says that demand for gold bullion from developed and emerging economies provides a further backstop for the precious metal.
"There is still tremendous activity on the physical side, though there is a divergence in demand for paper gold and actual buyers," she explained.
"A lot of that demand is coming from China and India, where there has been a substantial amount of physical purchases."
On rumours that the Swiss government is looking to sell its gold reserves, she said: "I recently read that the Swiss are going to request a vote on their central bank holdings."
"The central bank is currently required to have 20 per cent of its assets backed by gold."
"It’s clear they still like their gold and don’t want it to leave their country."
Markova expects volatility to persist in gold bullion for the time being, which will put further pressure on gold equities, which have had a torrid time of it of late.
However, once an equilibrium gold price is reached, she expects that both assets will re-correlate.
She explains that the cost of exploration and producing gold is higher than the current price of the precious metal, and has sold out of a number of positions as a result.
The manager says she will not re-invest those assets until there is a stable gold price.
"We have raised our cash holding to 8 per cent," she said. "Our bullion weighting is now 10 per cent and we have sold out of a number of junior miners because their balance sheets will be challenged by the changing price of gold."
"We are still following a barbell strategy of 36 per cent in large caps, 21 per cent in mid caps and 27 per cent in small caps."
"However, we have recently tightened the portfolio in order to take advantage of any further corrections," she added.
Markova manages the £57.2m Smith & Williamson Global Gold & Resources fund with Robert Lyon.
The fund was launched in December 2004 and over that time it has returned 122.10 per cent. The HSBC Global Gold index has returned 45.17 per cent over the same period.
Performance of fund vs index since Dec 2004
Source: FE Analytics
Like all gold funds it has struggled recently, and has posted losses over one- and three-year periods.
The fund has an ongoing charges figure (OCF) of 1.81 per cent and requires a minimum investment of £1,000.
FE Alpha Manager Evy Hambro (pictured), who heads up the BlackRock Gold & General fund, says that investing in gold miners has been so difficult recently because of a mixture of poor company management and the rise of ETFs.
"Over the last three years, the gold sector has underperformed the gold price as a combination of rising costs and poor delivery has reduced returns and eroded investor confidence," he explained. "In addition, the rise of physically backed gold ETFs has provided the equity investor with a low-risk alternative for gaining exposure to the gold price."
"Those companies that have delivered – that have re-invested cash-flows into high-returning projects, have shown capital discipline and returned excess cash-flows to shareholders – have achieved strong outperformance; the problem is that they have been few and far between."
"After pressure from shareholders, the industry has taken responsibility for the poor decisions made in previous years and over the last 12 months we have seen the top executives of most of the major gold mining companies replaced."
Although investing in gold shares remains risky at the moment, Hambro says if those companies can change their relationship with their shareholders, the sector could see huge inflows.
"Our message to this new generation of management is that they need to prove once more that they can provide leverage to the gold price and can add value through re-investment," he said.
"They need to rebuild the trust that has been eroded over the last five years, illustrate that they are responsible custodians of shareholder capital and that growth at all costs is not the right strategy."
"Management teams must realise that investors need to be rewarded for taking the risk of owning a share in a gold mining company rather than the ETF."
"Therefore they must differentiate themselves through returning capital to shareholders through dividends and, if their own share price has a greater return potential than new projects, through share buybacks," he added.
BlackRock Gold & General requires a minimum investment of £1,000 and has an OCF of 1.93 per cent.