Expectations of rate cuts have helped many asset classes this year, with much written about new highs for some equity markets in particular. But less noticed has been the recent record high achieved by the price of gold.
The price of gold has risen by 16.5 per cent since the end of February - mainly driven by those expecting the Fed to cut rates, combined with some central banks buying gold to cut their exposure to US dollars.
Lower base rates, especially in the US, are viewed as good for the gold price because they drive down bond yields, and gold competes with US government bonds, in particular, to be a “safe haven” asset class in portfolios.
Physical gold of course, doesn’t have a yield, whereas government bonds do. So the higher the yield on govies, the relatively more attractive they are as a safe haven. And when yields fall, or are expected to fall, so gold gets invited back to the party.
A glance at our database shows average allocations to commodities have suddenly gone up - from a low base to a slightly less low base. It now sits at 0.7 per cent, up from 0.35 per cent late last year.
One of the drivers of that has been Parmenion's recent decision to open a 1.5 per cent commodity position, which we covered here. But another has been Quilter Cirilium's decision to open, and then increase, a commodity position.
But it remains the case that the vast majority of allocators in our database have no explicit allocation to commodities at all.
A glance at our database reveals the majority of gold fund held by the allocators we cover are passives, with iShares Physical Gold ETF and Invesco’s Physical Gold ETF the most popular - appearing in three and four portfolios we monitor respectively.
The only actively managed fund vaguely in this sector to be owned by any of the allocators we cover is Ninety One Gold - though this invests in equities of companies involved in gold mining.
But one of the trends we have noticed is that several portfolio managers are looking in slightly more esoteric areas for their commodity exposure.
Recent funds to have been picked up by allocators we cover include GS Quartix Modified Strategy on the Bloomberg Commodity Index, L&G Multi-Strategy Enhanced Commodities ETF and UBS CMCI Commodity Carry SF ETF.
The latter two of these funds are held by Quilter Cilirium.
Ian Jensen-Humphreys, portfolio manager of the Cirilium range, said of the L&G fund which was introduced at the end of last year: "The rationale for this position is that it is one of a number of holdings that we might expect to perform well if inflation stays high or increases further. In addition to this we also have exposure to inflation linked government bond ETFs and infrastructure investment trusts (which have assets that deliver contractual inflation linked cashflows)."
All this suggests that maybe bog standard gold ETFs just aren't cutting it anymore.
