The key reason why the gold price is shining and investors are buying

Various fund managers are bullish on the outlook for gold, we explain why.

It has been a miserable couple of years for gold fans, but 2019 has seen the yellow metal enjoy a resurgence. So far this year, gold has risen from $1,281 to $1,493 at the time of writing (10 September), which represents an increase of 16.5%.

At the start of 2019, Money Observer outlined why owning a small part of a portfolio in gold, of around 5%, would make perfect sense. The reasons we outlined back then still stand, as there are more reasons for investors to feel more bearish than bullish at this juncture.

The prolonged US/China trade war and ongoing Brexit saga are two uncertainties that continue to give investors cause for concern.

Moreover, following a decade-long bull market it is only natural for investors to look down, rather than up. Therefore, the defensive characteristics of gold should in theory stand investors in good stead during periods when volatility picks up.

But according to Graham Bishop, investment director at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK, the key driver that has given gold such a boost is anxious bond markets.

He explains: “Throughout the summer, increasingly uneasy investors have flocked to bonds, pushing bond yields lower and lower. As we write, the level of negative yielding debt (where investors effectively pay to lend out their capital, if held to maturity) has ballooned to historic levels, above $16trn, amid ongoing trade war escalations and concerns about the outlook for global growth.”

Slim pickings in bond markets have had knock-on effects elsewhere in investment markets, he adds, particularly in the case of gold.

“The gold price has shown itself to be highly correlated to the rise in negative yielding debt, with risk-averse investors running to gold as one of the world’s oldest ‘safe haven’ assets. As a result, gold has had an extraordinary year so far, bolstered by investor anxieties in the market selloff in late 2018, and still climbing throughout the summer months. Indeed, gold was August’s best-performing asset class.”  

The professional investors going for gold

Various fund managers are bullish on the outlook for gold, including Michael Fitton, a portfolio manager at Cerno Capital. He says: “Gold is one of the most powerful stories in finance. Coveted in ancient cultures, it holds little intrinsic value in the modern age. Its industrial uses are limited, and it generates no yield for the holder. And yet, over centuries a story has been woven in which gold acts as the ultimate store of value. The universal reserve currency. This belief has survived innumerate tests.

“In the context of multi-asset investing, gold can therefore play an extremely useful role buttressing risk assets within the portfolio in times of stress. We currently observe elevated risks to global growth and a rising risk of unconventional monetary and fiscal policy. Within our multi-asset Cerno Select strategy we hold a 10% position in physical gold via ETFs.”

David Coombs, head of multi-asset at Rathbone, has also been going for gold, describing himself as a “reluctant buyer”.

He adds: “I do not normally rate gold as an investment, but I have been increasing exposure of late. Given the negative interest rates being offered by various 10-year government bonds, gold is better value, despite not even having a yield.”

Moreover, Heartwood Investment Management has also been adding to its gold holding throughout the year. Bishop adds: “For us, gold acts as a portfolio diversifier and a hedge in changeable market conditions, allowing us to keep risk (and the potential for reward) on the table elsewhere in the portfolio. However, we are mindful that – like all commodities – the price of gold can fluctuate rapidly.”

 

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