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Which has been the best way to invest in gold?

16 February 2017

FE Trustnet looks at whether investors would have been better off investing directly in the yellow metal or funds that invest in companies focused on the safe haven asset.

By Rob Langston,

News editor, FE Trustnet

Gold has traditionally been a safe haven for investors, particularly during the turbulent market conditions of recent years. However, fluctuating prices can often present a challenge for those wishing to gain access to the precious metal.

FE Trustnet has constructed a bespoke sector of IA universe funds investing in gold and other precious metals to look at performance over both the long and short term.

The sector includes industry heavyweights and well-known names such as BlackRock Gold & General, CF Ruffer Gold and Investec Global Gold.

Macroeconomic consultancy Capital Economics recently noted that gold prices had bounced back at the start of the year from lows late in 2016, following uncertainty caused by the UK referendum on EU membership and Donald Trump’s presidential victory. However, it warned that the revival in prices was unlikely to prove sustainable.

Performance of index since 1991


Source: FE Analytics

It noted that gold prices were likely to be affected by a number of factors including monetary tightening by the Federal Reserve, a strengthening US dollar and subdued consumer and central bank demand.

“While we suspect that geopolitical risks will give a lift to gold price at times over the course of this year, the bigger picture is that US monetary tightening is likely to prove too much of a headwind,” wrote the consultancy’s commodities team.  “We forecast that the price of gold will fall to $1,050 per ounce by end-2017.”

However, long-term investors in gold will have been rewarded over the years as prices have risen significantly – as shown in the graph above.

The benchmark Bloomberg Gold Sub index has risen by 204.80 per cent in US dollar terms since January 1991.

The rise of passive index-tracking funds offering investors access to the physical metal has been one of the factors behind the rise in prices more recently.

Other factors, such as growing middle class demand in emerging markets and the metal’s perceived lack of correlation to other asset classes, have also driven prices higher.

Over 10 years to 14 February, the Bloomberg index is up by 69.06 per cent in US dollar terms. Hedged back into sterling the index has risen by 166.03 per cent.

Investors would have been rewarded for investing in an exchange-traded product (ETP), such as the London-listed ETFS Gold.

Since February 2007, the ETF is up by 140.95 per cent compared with a 16.94 per cent rise for the average fund in FE Trustnet’s bespoke IA Gold fund sector, in sterling.

Performance of sector & ETF vs index over 10yrs


Source: FE Analytics

However, in recent years gold prices have waned as the low growth environment took hold and further financial and economic crises were averted.

On a five-year view, the ETF lost 17.34 per cent, compared with a 12.88 per cent loss for the index. Specialist active funds performed worse, with an average negative return in FE Trustnet’s custom-built IA Gold sector of 36.43 per cent.

Over three years the situation begins to reverse. The average fund from the FE Trustnet IA Gold sector reports a gain of 46.57 per cent, compared with a 19.07 per cent gain for the ETF and 22.71 per cent for the index.

During 2016, gold and precious metals-focused funds performed even stronger. Last year, the average gold fund returned 94.73 per cent, compared with a rise of 27.22 per cent for ETFS Gold and a 28.52 per cent returns for the index.

The best performer from the sector in 2016 was the small-cap focused WAY Charteris Gold & Precious Metals fund, up by 133.95 per cent; the highest return for a fund in the broad IA universe.

The £13.4m five crown-rated fund is managed by Ian Williams, Mark Williams, and Nick Taylor and aims to achieve capital growth through investment in international gold and precious metals stocks.

The four crown-rated MFM Junior Gold fund also returned more than 100 per cent in 2016.

Overseen by veteran commodities specialist Angelos Damaskos, the fund – which invests in small and mid-cap companies specialising in companies identifying, developing and extracting gold – rose by 103.99 per cent last year.

“After the sharp sell-off seen in the last quarter of 2016, precious metals have again started to shine as safe havens,” noted Damaskos in his latest fund fact sheet.

“Global equity markets have rallied to new all-time highs, expecting faster US and global economic growth as the Trump administration attempts to implement its grand plans.”

Performance of funds vs index in 2016


Source: FE Analytics

Indeed, all funds in the sector returned more than both the ETF and the Bloomberg Gold Sub index, which rose by just 28.52 per cent, in sterling terms.

The best performer over 10 years is the Smith & Williamson Global Gold & Resources fund, which is up by 56.64 per cent, followed by the BlackRock Gold & General fund with a 50.83 per cent return, although that pales in comparison with the rise in the Bloomberg index.

Despite the outperformance of gold-related equities fund managers, the precious metal remains popular among fund managers.

According to the most recent Bank of America Merrill Lynch fund manager survey, 34 per cent of respondents identified gold as the best investment if the world shift towards protectionism: a scenario whose likelihood has increased since the election of Donald Trump.

It coincided with other findings from the survey which highlighted noting that a record percentage of investors (15 per cent) thought that the precious metal was now undervalued.

Performance this year has been positive, so far. Since the start of the year the Bloomberg index has risen by 5.30 per cent, although the equity-focused funds have continued to perform more in line with the strong gains in markets, with all of the funds in the FE Trustnet IA sector boasting double-digit returns.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.