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Darius McDermott: The gold conundrum

20 May 2020

Darius McDermott, managing director of Chelsea Financial Services, explains why gold has surged in popularity and the funds he thinks could perform in the current environment.

By Darius McDermott,

Chelsea Financial Services

Gold is often a great guide for the pulse of the economy and the fact that gold-backed ETFs reached a record a high of 3,185 tonnes in the first quarter of 2020, according to the World Gold Council, tells you all you need to know about investor uncertainty and the search for safe havens amid this global pandemic.

If you look at the gold price in pounds sterling, it is at a near-record high, having risen 15 per cent in the past three months alone, so the logic suggests it’s the rational move.


Strange times

These are, as we all know, strange times – and logic often goes out of the window. We’ve seen $2trn of new money printed in the past month or so, as central banks globally look to provide a coordinated and quick fiscal response adding liquidity into the system. By contrast, roughly the same amount of money was printed over a decade to meet the challenges of the credit crunch and its aftermath.

Normally, this unprecedented level of monetary stimulus should be inflationary, but that is not the case on this occasion, and I feel that is unlikely to change for the next 12 months or so. It has also failed to de-value the existing money in the system – which could also improve the price of gold.

If you do believe in either of those scenarios – then gold should be the safe-haven of choice. There is always going to be a flight to safety, and whether it’s buying physical gold or a gold ETF, it has its value and will keep its value, while also being an inflation hedge for the future.

But there are reasons for caution, of which investors must be aware. These are principally tied to the relationship gold has with other assets when it rises. For example, normally when gold rises silver rises even more – almost like a leveraged play. That has not happened on this occasion.

In addition, while there is typically a low correlation between gold and equities that is not always the case during period of significant market stress when both can fall. As a recent research note I read from Fidelity International points out, when gold and equities become positively correlated, it usually signals a market regime driven by liquidity and changing real yields, such as the current environment.

It adds: “We also saw this positive correlation amid the aftermath of the 2008 financial crisis, the height of the euro debt crisis in 2011-12, and during a period of rising real yields in 2018.”


Backing the yellow metal

Despite the fact that it’s not a perfect safe haven (what is?), I’d still back gold as the asset class most likely to navigate any alphabet soup recovery scenario the market throws at us.

Those who want a specialist vehicle may want to consider the Merian Gold & Silver fund, managed by Ned Naylor-Leyland. The fund's underlying philosophy is that gold is money: Ned believes gold and silver should be thought of as a currency, not a commodity. The portfolio’s neutral position is 50:50 gold/silver, but Ned will manage the mix, adjusting the relevant weightings according to his view of the world. In a more defensive scenario, the fund will own more bullion and more gold. One thing I would also add is that although silver has yet to follow the rise in gold it could easily do so. Ned will also move the portfolio between bullion and miners depending on his macroeconomic view and valuations.

Those who are more cautious may choose to go down the multi-asset route by using the likes of the Jupiter Merlin Growth Portfolio, managed by John Chatfeild-Roberts and team. The fund has a 10.5 percent allocation to gold through Wisdom Tree Physical Gold and Amundi Physical Gold.

Another multi-asset fund to consider is Rathbone Strategic Growth Portfolio managed by David Coombs, which has an iShares physical gold exchange-traded commodity (3.9 per cent) as its top non-cash holding. David believes we are still heading for a deflationary scenario in the medium-term – for which he feels gold will also be a great hedge.


Darius McDermott is managing director of FundCalibre and Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.

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