In a year where most asset classes are recording handsome returns, it is striking that gold has taken such a pounding. For the year to the end of November 2013, gold was down 28.57 per cent, while the MSCI World index was up more than 20 per cent, as illustrated in this graph.
Performance of indices 30 Nov 2012 – 30 Nov 2013
Source: FE Analytics
The recent poor fortunes of the famous safe haven do seem fairly rational, during a period when risk-on was the order of the day and inflation has failed to materialise.
At the same time, sovereign risk is also perceived to have fallen, for example in the eurozone and the US, while, more holistically, systemic risk to the financial system is deemed to have reduced as central banks have waded into the fray. There are of course concerns about the longer term impact on inflation of the unprecedented expansion of central bank balance sheets. In the near-term though, we feel cautious towards such negative momentum, especially when there is no valuation support to measure gold.
Unlike equities, bonds and property, there is no earnings stream to discount, or dividend yield, to gauge value for commodities. Gold's value is arguably derived from speculation surrounding expectations and relative scarcity, which are not particularly helpful.
Some, more desperate for a gold valuation, have claimed that parity with digital currency Bitcoin could provide some sort of level. Indeed, per unit, it briefly became more expensive than gold recently. We look for less speculative valuation metrics.
Some experts argue that Bitcoin, an electronic alternative to gold as it is considered to be beyond government interference and with limited supply, has played a role in gold's fall from grace.
Time will tell if it is a genuine technology disrupter, but certainly there are some interesting dimensions to its development. Central banks, and the authorities more generally, seem to be open-minded about its evolution.
In terms of the portfolio, we currently maintain a very small [1 per cent] weight in gold. In the past it has proved to be an excellent, very liquid, diversifier, in that it appears to have been negatively correlated to equities. However, we prefer ways to diversify the portfolio that do not detract from investment returns and have less volatile profiles.
We have mentioned many times before that we struggle to find diversifiers in such correlated markets, but we still feel more comfortable with diversifiers other than gold.
For example, equities that are uncorrelated, shorter dated government bonds and property.
In the future, we think there will be extended periods when gold's safe haven status will mean it will have a more significant role in the portfolio. Fed tapering, for example, will provide a very different environment for gold.
David Jane is the manager of the Thesis TM Multi Asset fund, which has beaten its IMA Mixed Investment 20%-60% Shares sector since its launch in June 2011, with returns of 15.23 per cent.
Performance of fund and sector since launch
Source: FE Analytics
Jane was formerly head of equities at M&G.
