Investors who are riding high on the gold bull run but are aware it can’t last forever should keep an eye out for a “cathartic crack in the dollar” as the signal that the precious metal is about to lose its shine.
This is according to Alec Cutler, manager of the Orbis Global Balanced fund. Cutler takes a contrarian approach to asset allocation in his fund, or as he puts it: “When a trend extends long enough, we're going to be on the other side of that trend.”
And one trend he found himself on the “other side” of recently has been the underperformance of gold.
Performance of gold over 10yrs
Source: FE Analytics
“We've been waiting for a couple of years for gold to rally, and now it seems to be,” he said. “What's interesting is we're in a winner-takes-all world, where valuation doesn't matter anymore.
“And if that's applied to gold, who knows where it could go? What's good for the goose is good for the gander.
“I'm not in a hurry to take off the gold position just yet; one of the things we've learned is to let the winners run a bit.”
He added: “We do still have a valuation-based approach and there will be a time to take it off when other asset classes become more attractive.
“But with US Treasuries at 50bps and the German bund at -50bps, that doesn't look to be happening anytime soon.”
Cutler has 7 per cent of his portfolio in physical gold and another 5 per cent in gold miners such as Barrick and Newcrest.
The manager said that one of the major factors currently working in gold’s favour is that, of the small number of ‘hard assets’, it is the only one where you can confidently state there will not be a glut of new supply, as all of the easiest-to-reach deposits have already been mined.
This is one of the reasons why, even though he is seeing signs of activity that have been previously associated with a peak in the price – such as adverts for gold coins and renewed press interest in the commodity – he believes this story has further to run.
However, he said that what would make him quickly re-evaluate his position would be a “cathartic crack in the dollar”.
“All the other currencies have been very weak versus gold, so the dollar really getting slammed might attract us back into more dollar assets,” he explained.
“Gold tends to put in these long bottoms, then accelerates into an asymptotic peak of people melting down their jewellery. The timing of that peak becomes very difficult because you don't know how long it's going to run.
“It's just a fact that gold is more difficult to value, so, it's more difficult to rely on valuation techniques for that exit.
“But I think the currency breaking down would be the surest sign. Money moving aggressively out of equity funds and into gold would be the other.”
Yet while Cutler wouldn’t alter his bullish stance on gold unless the dollar begins to tumble, he thinks such an incident is highly probable and has taken a short position against the currency.
This view can be partly attributed to his contrarian outlook and the dollar’s strength over the past few years.
More important though are its poor fundamentals, which he said the market has yet to price in.
“For quite a while, balance sheets haven't seemed to matter, it's all been about economic activity and the US has been blowing its balance sheet out in favour of growth,” he continued.
“[Donald] Trump started it two and a half years ago with a major corporate tax cut, which drove up S&P earnings and economic activity, putting more money in people's pockets.
“Then during Covid, the US was the first and most aggressive to shove more money in, and the balance sheet is absolutely blowing out. If you were just to consider the balance sheet alone, the US dollar would be the weak currency. But because it has created that short-term relative economic activity, it has benefited from inflows.”
Cutler compared this to the eurozone, which he noted “didn’t blow its balance sheet out” when it didn’t need to and has dealt with the crisis better.
Performance of currencies over 1yr
Source: FE Analytics
And, while it has now started its own fiscal stimulus programme, the manager said it waited for a catastrophe before it turned on the taps, “and rightly so”.
“Whereas Trump put through a major tax cut when the US economy was the strongest in the world: it wasn't in recession,” he continued.
“So the US dollar looks expensive on a balance sheet basis.
“Most currencies don't look great versus real assets, however, and if you measure all of them against gold, which is the ultimate and oldest currency, they all look a bit wonky.”
Data from FE Analytics shows Orbis Global Balanced has made 58.13 per cent since launch in January 2014, compared with 86.26 per cent from its benchmark (split 60:40 between the MSCI World and JPM GBI Global [sterling hedged] indices) and 41.29 per cent from the IA Mixed Investment 40-85% Shares sector.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The £42m fund has ongoing charges of 0 per cent, but takes 50 per cent of any outperformance over its benchmark.