The onset of the coronavirus pandemic earlier this year has had a number of effects on markets and investor behaviour. Risk assets were among those facing the biggest swing in sentiment early on, as investors sought out ‘safe havens’ like gold.
And while sentiment has returned for risk assets in recent months as governments have pledged huge sums to support their economies, there still remains a strong appetite for the yellow metal.
This appetite has helped drive the returns for gold equity strategies, some of which have featured prominently at the top of performance tables in recent months.
Over the past three months, the Bloomberg Gold Sub index – a commonly used benchmark for gold prices – has risen by 9.49 per cent (in sterling terms). However, the FTSE Gold Mines index – which tracks the performance of gold mining shares – is up by 28.47 per cent.
Performance of indices over 3mths
Source: FE Analytics
More recently, however, gold has seen more subdued performance with the Bloomberg Gold Sub index up by just 1.17 per cent in the month to 2 June.
Below, Trustnet asks several market experts which strategies they are using for exposure to the precious metal and what role it should play in an investor’s portfolio.
Tilney Investment Management Services managing director Jason Hollands (pictured) said investors usually hold gold as an insurance policy “in the event of a financial crisis where confidence in paper currencies wanes”, something that is playing out now as concerns surrounding inflation build after the huge amounts of support being thrown at economies to prevent them from collapsing as lockdown conditions and consumer behaviour changes post-coronavirus. 
Given the fact that gold is usually held as a more defensive position in a portfolio, Hollands recommends investing in a physical gold strategy – such as Invesco Physical Gold ETC – rather than gold mining securities because the physical extraction process has higher added costs and is vulnerable to huge shifts in the gold bullion price.
However, both AJ Bell’s Ryan Hughes and Charles Stanley Direct’s Rob Morgan opted for a gold mining equity strategy in the £1.4bn BlackRock Gold & General fund. The two agreed that it could add a level of insurance to an investor’s portfolio in the coming months, especially if there is a second wave of Covid-19 cases.
Investing mainly in gold and precious metal mining the fund is co-managed by Evy Hambro chief investment officer of BlackRock’s natural resources team, and FE fundinfo Alpha Manager Tom Holl.
“The attraction lies in the quality and experience of the team as well and the robust process adopted,” said Morgan, pensions and investment analyst at Charles Stanley Direct. “There is a bottom-up approach to stock selection driven by valuation with a top-down sub-sector overlay which takes into consideration factors such as political risk and broad macroeconomic risk.”
Performance of fund vs index over 3yrs
Source: FE Analytics
Over the past three years the fund has made a total return of 43.12 per cent underperforming the FTSE Gold Mines index which made 65.86 per cent. It has an ongoing charges figure (OCF) of 1.18 per cent.
On gold, Hughes said considering a ‘safe haven asset’ after such a major market correction and the start of an economic crisis could, on paper, seem a little too late.
However, the AJ Bell head of active portfolios doesn’t think that’s the case with gold as it “continues to offer attractive diversifying characteristics in a portfolio with a negative correlation to the FTSE All Share index over the past five years”.
Looking beyond the short-termism of the coronavirus crisis, Hughes said the long-term outlook for gold as a defensive asset was “interesting”, given the challenges facing government bonds due to the amount of issuance required to pay for the coronavirus bailout, and, investors will likely turn to precious metals stocks.
Yet there is one fund picker who doesn’t agree that gold mining equities are the way to.
“You may get from A to B through something like the Blackrock Gold & General fund,” said fund consultant and strategist Andy Merricks, “but do you really want to be experiencing close to 40 per cent drawdowns along the way from an asset class that is supposed to be ‘safer’? 
“Gold equities are only really a geared play on equities themselves – obviously linked in some way to the gold price in the same way energy stocks tend to move in tandem with the oil price – so we prefer to have our diversifiers very clearly separate from our equity allocations.”
Bullish on gold, Merricks (pictured) said that he and investment team behind the £11m 8AM Focused fund had increased allocation to physical gold by 6 per cent recently, giving it a 13.5 per cent gold exposure overall, including both hedged and unhedged positions.
This increase in allocation followed the recent equities rally in the past couple of months , something which Merrick said ignores the fact that millions of people are going to come out of this crisis unemployed, denting consumer confidence.
“As in 1929, 2000 and 2008, similar bounces were followed by retracement of markets to near, or below, previous lows, yet this one hasn’t done that yet,” the consultant said. “It may not, who knows, but the state that the world finds itself in really is not that encouraging.”
As such, the fund’s gold allocation was not only for defensiveness but “try to make some semblance of gains in the event of an equity correction”.
Should a market correction come, the fund consultant said that “gold fits the bill for the current state of play,” as he expects a repeat of the behaviours seen in the 2008/9 crisis where gold began the crisis rallying with equities and carried on going when inflation worries surfaced.
“Either way, physical gold in an ETF format provides a liquid and tradeable place to shelter,” he concluded. “I like the notion that the Fed isn’t printing gold. As a finite, real asset it provides some potential for upside when other assets are sliding.
“In short, the upside from gold from where we are right now looks to us to be more favourable than the downside.”