Ned Naylor-Leyland, manager of the Merian Gold & Silver Fund, looks at the benefits of actively-managed gold exposure.
While it is impossible to get a genuine feel for the scale of the global daily gold market, the limited London Bullion Market Association data that is available reveals a turnover that is in the hundreds of billions of dollars equivalent every day. Of that, a mere sliver is physical trading, maybe 1-3% of overall daily traded volume.
As such the majority of gold positions that come together to create price discovery in this market are actually various forms of credit instrument, rather than real metal. In some parts of the world, these gold obligations or credit gold instruments are openly described as ‘paper gold’, in others ‘unallocated gold’ and sometimes they are just called ‘gold’ – this is not an accurate description of the risks inherent to the instrument being offered.
Credit or paper gold is not true gold exposure; rather, it is the credit risk of the institution that issued the instrument.
Unlike regular banking, awareness of this problem and ensuring ownership of real physical gold can turn what’s otherwise a structural risk into genuine return potential. This is fundamental to the success of a gold fund manager, and needs to be taken seriously when selecting bullion instruments in a portfolio.
The best form of gold is physical, in your pocket, but that is very hard to replicate in a portfolio. But being as close to physical gold and as far away from credit gold as possible is key to successful investing in the asset class. As such, analysing who can access the bullion and under what conditions access can be ‘gated’ or halted is hugely important in selecting the right instrument.
This is part of the reason why we place such emphasis on governance. In a world of precious metals, knowing what you own is extremely important.
We take an active approach to investing and, through a rigorous research process, we endeavour to gain exposure to bullion that is stored and traced to the highest global standards. At the same time, and very much using the same philosophical stance we hold on risk mitigation, we will only invest in mining companies that operate with the highest standards of governance and employee welfare.
Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
This communication is issued by Merian Global Investors (UK) Limited (“Merian Global Investors”), Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4P 4WR. Merian Global Investors is registered in England and Wales (number: 02949554) and is authorised and regulated by the Financial Conduct Authority (FRN: 171847).