Macro picture sees precious metal shine

This article is part of
Investing in Commodities – April 2016

Macro picture sees precious metal shine

Gold generally finds favour among investors during periods of turbulence thanks to its reputation as a “safe haven” asset, so it is hardly surprising people are allocating to the metal once again this year.

Seven Investment Management’s multi-asset team has bought gold for the first time in three years, as reported by Investment Adviser earlier this month, showing fund managers are dipping their toes back into the asset class.

Andrey Kuznetsov, credit analyst at Hermes Investment Management, observes commodities are rallying, boosted by a number of macro factors, including an improvement in the data coming out of China.

“The second [factor] is a more dovish Fed and lower expectations about interest rate increases, which leads to a weaker dollar and stronger emerging market currencies, which provide support to the cost curves in commodities and are also positive for gold,” he explains.

“If you compare gold to other metals, it is less driven by China,” Mr Kuznetsov notes. “So it provides you with portfolio diversification if you are worried about the Chinese slowdown, which tends to be the theme.”

John Mulligan, director of investor relations at the World Gold Council, says: “In terms of the broader benefits of gold, diversification is always the strong long-term argument.”

He points out it is also more liquid than other alternative assets, has lower volatility and strong fundamentals.

Explaining what he believes underpins current investor interest in gold, Mr Mulligan cites the impact negative interest rates are having on the credit market in particular.

“I come from an asset allocation background and, if you look at how you model a portfolio and the role of what were previously seen as safe and stable assets, that is the sovereign bond market, [and] that is now a shrinking pool,” he says.

“[It is] a smaller pool of assets that investors and portfolio managers can turn to to fulfil that low-risk balancing aspect in portfolio management.”

So gold is finding a place in investors’ portfolios where previously fixed income would have been. The increasing accessibility of gold also plays a part, with gold ETFs now widely available.

Mr Mulligan observes: “The gold ETF market [has] had inflows of 350 tonnes this year alone to date. That’s more than all the gold ETFs that were sold in the last two years and we’re only into April – it just shows you the shift in investor attitudes.”

Central banks too have been buying gold recently. Ned Naylor-Leyland, manager of the Old Mutual Gold and Silver fund, reveals central banks now have 18.2 per cent of their FX reserves in gold bars.

He insists that gold and silver are not commodities but rather currencies, which is why they are in favour while other commodities are not.

“In other words, the way they behave is according to their currency market dynamics. They do have ‘commodity-ness’ because they are physical metals but this is where they don’t behave like pure commodities.”