Gold outpaces rival asset classes

Following a prolonged period of miserable returns, gold investors are finally clawing back some losses, with the precious metal currently the top performing asset class of 2014.

Since the start of the year, bullion has rallied by 9.3 per cent, well ahead of its nearest challengers, the S&P 500 and the STOXX 600 indices, which have notched up respective gains of 6.2 and 5.5 per cent in dollar terms, according to JPMorgan Asset Management.

In April 2013, gold suffered its biggest sell-off in more than 30 years. Investors were left reeling and the 2013 performance of gold-focused funds was hit severely. Evy Hambro’s BlackRock Gold & General fund plummeted by 48 per cent in 2013; Smith & Williamson Global Gold & Resources fund, run by Robert Lyon and Ani Markova, shed 45 per cent; and Angelos Damaskos’ MFM Junior Gold fund lost 66 per cent, according to data from FE Analytics.

In line with the metal’s recent rebound, portfolios bolstered by the leverage offered by mining equities have soared.

While the average Global Equity fund is up by 2 per cent in 2014, BlackRock’s gold vehicle has delivered a total return of 19 per cent, Smith & Williamson is ahead by 25 per cent and Junior Gold has achieved 26 per cent, according to FE Analytics.

A cheap dollar, expensive-looking equity markets and geopolitical tension are all being cited as reasons for the renewed investor interest.

However, global demand for jewellery – the most significant component of overall demand – totalled 571 tonnes in the first three months of 2014, which not only marks a 3 per cent rise on the same period last year but also the strongest annual start for jewellery since 2005, according to the World Gold Council.

In addition, India, the world’s second-largest gold consumer, is due to pass its budget by July 31. Many expect to see a cut in the gold import duty and a relaxation of its trading rules.

Nick Moore, commodity strategist at BlackRock, said he believes gold is reacting more to commodity fundamental themes and less to financial drivers for the first time in years.

He said these include “declining world mining supply, enduring thirst for gold by the central banks, sharply lower outflows from exchange-traded funds, rising jewellery demand as a result of the lower gold price... and geopolitical overlay”, specifically the Crimea annexation and the Isis insurgency in Iraq.

However, experts remain wary. Patrick Connolly, a certified financial planner at wealth manager Chase de Vere, said: “Given the height gold has fallen from, some investors are likely to be looking at it as a potential buying opportunity.

“The question is: is gold actually set to rise or is this merely a ‘dead cat bounce’?”

Darius McDermott, managing director at Chelsea Financial Services, said: “Gold has been a very poor asset class for three years, and while it is extremely volatile, a little bit of gold in a diversified portfolio is not necessarily a bad thing, given it is likely to increase in value during periods of political unrest.”