This year hasn’t been a stellar period for investors so far, but it’s definitely been a good year to be in gold.
The price of the precious metal surged to $1,272 (£890m) a troy ounce earlier this month, up 20 per cent from the end of December. In a reversal from recent years’ trends, global gold equities have done even better, up 54 per cent in US dollar terms.
Many of the fund managers I speak to believe the fundamentals are now in place for an extended period of gains.
I agree the short-term environment for the commodity looks supportive, with low to negative interest rates, ongoing QE and, sadly, no end in sight to geopolitical concerns in Russia, the Middle East and North Korea.
Lowered expectations around rate rises in the US, in particular, are good news – from a gold perspective – as they suggest shaky global growth prospects and extended market volatility.
Longer term, supply and demand are also moving in favour of price growth. While the World Gold Council says the market remains in surplus, it notes primary gold production peaked in 2015. Four years of declining prices have translated into reduced capex among miners.
Demand in the world’s two major consumer markets for gold, China and India, has been mixed. China’s imports hit record levels in December, but India’s outlook is less certain following yet more gold-related taxes.
On the other hand, demand from emerging market governments (who covet the safe haven asset as insurance against declining currencies) and central banks globally remains strong.
The outlook for gold miners is better than it has been in several years. Gold equities severely underperformed the gold price throughout the most recent downturn, as investors lost confidence in companies with high debt levels and poor management.
However, drastic price falls post-2011 forced miners to become far more cost-efficient. Falling oil prices and weaker currencies also helped, leading to increased margins and improved free cash flow generation. For the first time in several years, we are now seeing gold equities outperforming the price of the underlying commodity.
For individual investors, all this adds up to it being a pretty good time to consider putting gold into a portfolio.
Recent history shows it is one of the few investments that truly functions as a diversifier in turbulent times. Throughout the global financial crisis, for example, many assets became increasingly correlated. Gold, and even gold equities to a lesser extent, was one of the few assets that was negatively correlated – its price moved in the opposite direction – to almost all sectors in 2007–08.
If you’re interested in gold equity exposure, I like the elite-rated BlackRock Gold & General fund. It’s at the higher end of the risk spectrum and returns are still sensitive to the performance of gold bullion. But BlackRock has one of the few remaining dedicated resources teams left among fund houses, and this, combined with the expertise of manager Evy Hambro, makes the fund a contender for portfolio diversification.
Launched in 1988, the fund has proven itself in several cycles and total returns in sterling are up 46 per cent year-to-date, showcasing its potential as an uncorrelated asset in volatile markets.
Darius McDermott is managing director of FundCalibre
