Introduction
On July 20, the price of the so-called safe haven asset fell to its lowest level in five years amid a strengthening US dollar and growing speculation around an interest rate rise by the US Federal Reserve.
The cost of gold slumped to $1,088 a troy ounce, down 4 per cent, for the first time since March 2010.
The S&P GSCI Gold Spot index is down 7.92 per cent in sterling terms in the year to July 21, data from FE Analytics shows. Meanwhile, the FTSE Gold Mines index has struggled in the past year and is down 39.47 per cent.
Christophe Donay, chief strategist at Pictet Wealth Management, notes: “As fears about [a] Grexit have dissipated, markets have switched their focus back to fundamentals, which are broadly supportive. This has buoyed stocks and weighed on safe-haven assets like gold.”
He continues: “Suggestions [the] sell-off was driven by the People’s Bank of China (PBoC) revealing its gold holdings… [for the first time since 2009] look questionable. China should at the margin be a supportive factor for the gold price going forward, as the PBoC may want to increase its gold holdings in the medium term to be more comparable with other major central banks like the Fed and the ECB that have currencies in the SDR basket [a selection of national currencies used by the IMF].
“Instead, the depth of the sell-off looks to have been the result of a short squeeze magnified by illiquidity. The sharpest falls occurred when most markets were closed, and the impact of stop-loss sales was magnified by a lack of liquidity.”
Mr Donay also points out that while silver is generally closely aligned with the gold price, in this instance silver remains above what he refers to as its “critical support” of $14.42 per troy ounce.
All of this means gold and precious metals managers are under increasing pressure to generate any kind of return in an environment that is distinctly against them.
The Association of Investment Companies’ Commodities & Natural Resources sector, which comprises 10 trusts, has failed to deliver a positive return over one, three, five or 10 years to July 21. FE Analytics reveals that in the past 12 months the sector had an average loss of 35.25 per cent, while across five years the sector recorded an average 56.95 per cent loss.
However, there may still be reasons to hold onto gold and other precious metals, such as platinum and palladium.
Adrian Lowcock, head of investing at Axa Wealth, points out “in times of distress [gold] is in great demand, and for this reason will continue to appeal to investors who are concerned about the strength and persistence of the economic recovery”.
He advises that no more than 5-10 per cent of a portfolio should be exposed to gold, though.
For those investors who remain undeterred by recent events, Mr Lowcock says: “Investors can use gold to provide some insurance against inflation and to protect against falls in prices of other asset classes, such as equities – when they sell-off, [the price of gold tends to] rise.”
THE PICKS
WAY Charteris Gold and Precious Metals
This is a tiny fund at just £3.5m, although it launched back in February 2010. Its objective is capital growth through investing in companies with core businesses in the mining, refining, production and marketing of gold and precious metals. Some of its top holdings include Endeavour Silver, Fortuna Silver Mines and Teranga Gold. As with any fund in this sector, it has been struggling to make positive returns. Across five years to July 21 the fund has lost 59.62 per cent, while in the past year the fund lost 53.07 per cent.
Investec Global Gold
George Cheveley and Hanre Rossouw co-manage this £38.3m fund, which has a global remit to invest in gold-mining companies and firms involved in the mining of other precious metals. According to its factsheet, the portfolio has 81.6 per cent in gold producers, 5.8 per cent in silver and 4 per cent in palladium. Its top-three positions are Randgold Resources, Newmont Mining and Goldcorp. Unsurprisingly, the managers have not been able to deliver positive returns over any period to July 21 and in the past 12 months the fund has posted a loss of 38.98 per cent.
EDITOR’S PICK
JPM Natural Resources
Neil Gregson leads the team behind this £704.8m fund that invests in companies involved in the production of commodities. It has a long track record, having launched in 1965 and, unlike the majority of its peers, has been able to notch up a positive return over the long term. FE Analytics reveals that in the 10 years to July 21, the fund returned a positive 4.42 per cent. More recently, its performance has suffered though, down 38.70 per cent in the past 12 months. Gold and precious metals comprise 23.6 per cent of the portfolio. Among its top-10 holdings are Goldcorp and Agnico-Eagle Mines.
