Although globally traded in dollars, from a sterling spot price ten years ago of less than £200/oz it peaked earlier this year above £690/oz. Figures provided by industry organisation the World Gold Council suggest that it has also been a good short-medium term bet. Between 22 May 2007 – 21 May 2009, the price went from £335.20/oz to £596.49/oz. Over the period £1,000 invested would have become £1,779.50. The FTSE All Share returned £699.46.
Unsurprising, then, that among the five most viewed fund factsheets on Trustnet over the past year are BlackRock Gold & General and JPMorgan Natural Resources. Both are open ended funds offering investors exposure to gold via portfolios of listed mining companies. Others of interest include CF Ruffer Baker Steel Gold, Investec Global Gold, and Smith & Williamson Global Gold & Resources.
Performance of gold funds over the past 1-mth
Source: Financial Express Analytics
But, surprising all the same in light of the traditionally small percentage of investors’ portfolios given over to gold, and considering concerns over volatility - near-term there has been an increase in the number of trading days when the sterling price over a rolling 60-day period dropped more than 8.5 per cent, accentuating concerns returns could come under pressure.
Fund managers and intermediaries still, though, see a place for gold in investors’ portfolios.
Richard Davis, recently installed co-manager of the £1.6bn BlackRock Gold & General fund – which returned more than 685 per cent in the past decade – said that investors are the key force behind what he sees as an ongoing long-term bull market. Unlike those buying for jewellery purposes – which accounts for some two-thirds of annual global demand – investors are less price sensitive. If the price goes up again that will not deter those who have already acquired the asset from thinking about acquiring more again.
The supply of gold meanwhile is so inelastic that "even if gold went to $2,000/oz for 10 years" it would not have a big impact on the amount of new gold mined, Davis argues.
"We probably passed 'peak gold' back in 2000-1", Davis said, meaning that key mines are getting older in places such as South Africa are not being replaced by new ones equally as resource rich.
Daniel Sacks, manager of the £50m Investec Global Fund said that professional and retail investors typically still have a relatively small percentage of their wealth tied up in gold, giving potential for much more money to go that way, encouraged by the fact that on an inflation adjusted basis gold remains well off its 1980 price of $2,500/oz.
Looking forward through 2009, UK investors could benefit from holding gold regardless which way the economy goes.
"Gold appears to be benefiting both from being the traditional hedge for inflation hawks, some of whom are now beginning to worry about the risk of hyperinflation, and from the mistrust of some investors towards cash assets and government obligations. It would probably only require a minority of investors to believe that they need to continue to allocate more towards gold to have a significant price impact."
Mick Gilligan, head of research at Killik & Co has little doubt inflation will come to the UK as a result of Quantitative Easing: "It’s a question of when not if."
Following the key measure of capacity utilisation suggests there is little immediate risk of inflation 'bite' – there is still considerable spare capacity in the economy - so overall Gilligan suggests some exposure to gold, but to keep it at low levels. Depending on the type of investor a range of between 0-10 per cent is suitable to consider. His personal choice currently would be in the range 2.5-5 per cent.
Justine Fearns, head of investment research at IFA AWD Chase de Vere likewise is positive with caveats. "It may slip up a little here and there but the bottom line is that gold is the asset that investors turn to in times of crisis; it doesn’t have to just be a hedge against inflation," she said.
"Its liquidity is key, depending on how it is held, as it helps investors meet liabilities. It is also still recognised as an alternative currency, which adds to the reasons for."
Fearns said investors need to watch volatility.
"Gold has a tendency to become more volatile when the price is rallying so spot price volatility could pick up further as demand continues. In the shorter term, it may well behave differently as an inflation hedge to the long term trend but the correlations between gold and other asset classes are so low it would be difficult to see that its inflation hedging attributes would be lost completely."
Darius McDermott, managing director of Chelsea Financial Services, said ongoing visits to fund managers reveal a split between those concerned about deflation versus inflation risk. While gold traditionally has been acquired as a hedge against inflation by UK investors, "the fund management industry is yet to see consensus" on its merits at this time.
McDermott suggested investors get some exposure if none is there currently, but should aim to do so below a price of $900/oz, preferably nearer $850/oz (roughly £570-£540 as of the third week of May).