Multi-assetAug 12 2016

Fund Selector: Time is right to go for gold

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Fund Selector: Time is right to go for gold

For much of my career so far I have had a strong dislike for the shiny yellow metal – gold – aligning my view with that of Warren Buffett, who frequently rails against its lack of utility.

There are many investors out there like me, so I wanted to explain why I believe now is the time to hold it. We introduced a position in gold last October across most of our portfolios and have added to it in the last few weeks.

My fundamental gripe against gold is that it lacks any real intrinsic value. Some gets used for jewellery, and it’s a fantastic conductor which means it has some specialist industrial uses, but mostly it is hoarded away, functionally useless.

There is no underlying central bank or economy to drive it like a paper currency, no earnings stream to value it like a company, and no liability nor default risk to value it like a bond. It doesn’t even provide an income yield. Instead, all of its value is essentially extrinsic, making it very difficult to meaningfully analyse, and creating what can be a fickle investment.

However, gold does have certain characteristics that I find appealing in the abnormal investment environment I believe us to be in. Excessive liquidity, made worse by aggressive and unconventional monetary policy, has pushed up asset prices, and the traditional asset classes of equities and bonds appear unsustainably expensive. As these asset classes have started moving more in lock-step, alternative assets that have low correlations with both equity and bond markets – such as gold – become more appealing and provide much-needed diversification.

I also see a medium-term investment case in gold as investors look to use it as a store of wealth while central banks expand the unconventional monetary policy experiment further into unknown territory with negative interest rate policies, ‘helicopter money’ and so forth.

While I don’t see gold as a ‘safe haven’ – it has been volatile throughout its history and in US dollar terms it has fallen as much as 40 per cent since its post-crisis peak – its finite nature makes it effectively resistant to the currency devaluation that could ensue as central banks tinker with the paper-money supply. In addition, a zero yield is a lot less of a hindrance in a world of ultra-low, zero or negative interest rates.

For fund buyers, there are a number of options. Gold mining equities have the advantage of being effectively a leveraged play on the gold price, and can offer a small dividend yield. However, these are still equities and can have relatively high volatility and greater correlation with equity markets, particularly during an aggressive equity market sell-off – precisely when you are looking for the benefits of diversification.

Therefore, my preference would be to use exchange-traded products that are tied to physical gold bars held in secure vaults. These provide cost-effective exposure to the physical asset, with effectively no counterparty risk.

While I don’t believe in the long-term, all-weather investment thesis often put forward by gold bugs, I recognise there are times when it makes sense to include gold as part of your investment strategy: when equities and bonds are both looking expensive, and paper-based currencies appear vulnerable to policy-induced devaluation. Now is one of those times.

Ben Seager-Scott is head of investment strategy at Tilney Bestinvest