Gold has gone from being one of the most loved to arguably the most loathed asset class over recent years.
From the turn of the century to 2011, the price of the yellow metal soared to $1,900 per ounce. However, due to varying factors such the fact it doesn’t throw off any income and as inflation has remained subdued, it has lost 38.19 per cent of its value since 2011 and currently stands at $1,160.
While it recovered earlier this year, it turned out to be somewhat of a “dead cat bounce” as gold has once again fallen over recent months as investors have felt more comfortable taking risk following encouraging economic data out of the US. The price is down 3.15 per cent year-to-date.
Performance of gold in 2014
Source: FE Analytics
However, though the consensual view is that the outlook remains challenging for gold, Becket – chief investment officer at Psigma Investment Management – is maintaining his position and may even look to buy more of the precious metal over the rest of the year.
“As grim as gold has been this year we are sticking with our exposure,” Becket (pictured) said.
“Gold's benefits will eventually shine through and as a diversifier within portfolios it has obvious benefits. Gold has no obvious positive correlations with other asset classes at this time. With sentiment towards the metal at extremely bearish levels, it is a question of when and not if gold recovers, in our opinion.” “In the short term the price can certainly fall further, but looking further out we expect gold to gain. It'll take courage to buy more and for those with steely nerves and a steady hand, a buying opportunity is coming.”
Gold had been one of the best performing asset classes during the post-recovery years as, according to FE Analytics, between 2008 and 2011 it returned 86.97 per cent while the global equity market was down close to 20 per cent.
Performance of indices between Jan 2008 and Jan 2011
Source: FE Analytics
Becket says there were a number of reasons why gold was such a “shining star” for investors over that time, such as it being oversold by hedge funds during the crisis, sustained currency “thrashing” by the world’s central banks and the unfortunate mixture of financial instability and inflation.
That bubble has now burst, however, and though the Becket admits gold is hated by the majority of the investment community, he says it is an interesting time to revisit the asset class.
“We are not in the 'guns, ammo, canned goods and gold bullion' camp at Psigma but we can see reasons why gold could perform much better in the years ahead,” he said. “The first reason is basically the same reason why gold performed so well between late 2008 and 2011; inflation and instability.”
“I'm sure any projection of inflationary pressures will trigger a chorus of boos, particularly given the recent collapse in energy prices, but we believe that commodity prices are trading towards their lows and that the disinflationary forces will dissipate.”
One of the major reasons why gold bears have clung to the battered precious metal over recent years is the belief that it will provide protection against inflation as a result of quantitative easing (QE) from the Fed; though many have questioned how effective gold is at hedging against the rise in general goods and services.
Nevertheless, with central banks in Japan and Europe stepping up their stimulus measures, Becket says it is still a valid argument for holding gold.
“We also wonder what effect there might be on prices generally, if the efforts of the central banks are successful and we finally start to see concerted credit creation throughout the developed world, as various forms of QE started to work,” he said.
“We would suggest that with the Bank of Japan going nuts with their printing press, the European Central Bank surely heading that way and central banks' balance sheets generally swollen, you'd have to surely be worried that this money printing eventually has distorting effects on prices.”
“These fears remain elusive for now and it was clear evidence of how hated gold is, that on the day that the Bank of Japan screamed at markets that they were going to flood them with yen that gold bizarrely fell.”
Becket also points to another reason why the gold price won’t fall much further from here.
“The next support for gold is the continued frenzied buying that is taking place by the consumers and central banks of 'emerging' nations, particularly in Asia.”
“Chinese demand will reportedly be 2,000 tonnes this year, equivalent to the whole annual output of the gold mining industry. Even the Russian central bank, who presumably have need for their cash elsewhere, have been buying bullion in recent weeks.”
“Certainly, we do not expect any net-selling from central banks, so their actions should be a continued prop for the gold price.”
Investors who want exposure to the precious metal can either buy an exchange traded fund which tracks the price of gold bullion or they can use funds which in invest in the shares of gold mining companies.
Becket says this is a riskier strategy, however, describing gold miners as “leveraged beta” to physical gold – and that has certainly been the case recently.
According to FE Analytics, for example, the gold price has fallen 34 per cent over three years while an equally weighted portfolio of the seven IMA gold funds has lost an eye-watering 70 per cent over that time.
Performance of composite portfolio versus index over 3yrs
Source: FE Analytics
Source: FE Analytics
The best performer over that time has been Evy Hambro’s Blackrock Gold & General fund, which has tended to be one of the most popular, though it has still lost 59.21 per cent. The worst performer has been Angelos Damaskos’ MFM Junior Gold fund, which invests in small-cap gold miners, with losses of 81.79 per cent.
Gold mining funds did begin to bounce back earlier this year on the back of low valuations, though as a recent FE Trustnet article highlighted, they have since given up those returns as the composite portfolio is down 8 per cent year to date.
