Bill O’Neill, chief investment officer, EMEA Merrill Lynch Wealth Management said hedging in gold can offer benefits if inflation returns.
“Historically, gold has been a hedge against inflation. Inflation effectively reduces the value of a currency. The large supply of money has not been lent, but held in banks’ reserves, therefore not proved inflationary as the velocity of money has declined,” he said.
O’Neill said investors are still concerned that if the economy recovers, then velocity will increase at a faster rate than that at which central banks can reduce liquidity, resulting in higher inflation.
“Gold is clearly a very desirable asset as it essentially provides insurance against the tail risks: the risk that further monetary expansion to counter deflationary forces reduces the value of developed economy currencies, and in turn, increases the risk of high inflation if the recovery proves successful.”
Ian Henderson, manager of the JPM Natural Resources fund also commented on the currency benefits.
“Gold is being used at the moment as a hedge against currency and stability. Some people are concerned that inflation might increase; I do not see that at as a particular threat, although it does mean that commodity prices are rising and that has some consequences for inflation,” he said.
“More recently central banks have become net buyers of gold with India, China and Russia buying. The fact that central banks are buying gold is quite interesting because it does to a degree give some creditability to gold as a form of currency. Investors should look to gold as an alternative currency.”
Shamim Mansoor, head of precious metals sales at EFT Securities also believes gold is still a good investment.
“The fears of a double dip in the UK and US are still prevalent and the sovereign debt crisis has not completely been eradicated. Gold is still a safe haven; it is the flight to quality. Furthermore, gold is a diversification tool as it bears little to no correlation with most other assets. Gold is also a hedge against weakness in the dollar,” said Mansoor.
Data from Financial Express shows there are 15 IMA UT and OEIC defined funds with exposure to gold. Exposure ranged from 0.5 per cent to 85.8 per cent. The performance of the five funds with the highest exposure to gold, over a one year period, can be seen in the chart below.
Gold driven performance over 1-yr
Source: Financial Express Analytics
Looking forward Henderson said experts expect the price of gold to continue rising.
“The consensus amongst gold optimists is that the all time high is going to be broken and that the price will go above $1,300 probably before the year end,” he said.
However, Simon James, founding partner, Gore Browne Investment Management said he is wary of gold.
"The question is whether the bubble is about to burst. I suspect it is not because I think the uncertainty is going to remain for a long time. Personally, I would be disinclined to be buying it," he said.
"People are very uncertain and that is why they own gold. I think that there will be a point in time in the next couple of years when investors no longer think we are heading into an economic calamity. At that point in time will then buy risk assets more aggressively and they will sell gold," he concluded.