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Why advisers should line their portfolios with gold

Why advisers should line their portfolios with gold

Advisers have been urged to invest in gold to mitigate the potential for geopolitical turbulence in 2020.

Speaking at a Schroders breakfast briefing yesterday (January 22), Janet Mui, global economist at Cazenove Capital, said she thought investing in gold was the best way for advisers and fund managers to hedge the risks in their portfolios. 

She said: “Gold has the feature of portfolio hedging and diversification. Gold should be in your portfolio.”

Gold tends to perform well when geo-political uncertainty is high as it is a store of value.

It is viewed as a safe haven asset because there is a limited supply of it in the world and this particularly takes effect when at times of high inflation, as gold is scarce.

A significant driver of the gold price is the yield on US government debt. US government debt is also viewed as a safe haven, and so effectively competes with gold. 

Gold does not pay an annual income so if the income being paid by US bonds is high, gold is less attractive as a safe haven whereas if, as is the current scenario, the income on US bonds is low then gold looks relatively more attractive.

Ms Mui thought the rise of populism, geopolitical tensions (including between the US and Iran) alongside the US-China trade war could cause uncertainty for markets over the coming year.

Although the trade war between the US and China shows signs of waning, Ms Mui said she thought the rise of China and the competition it brings to the US meant we would continue to see struggles between the two.

But Tom Sparke, investment manager at GDIM, said gold had its limitations as a defensive hedge.

He said: “We would not expect our usual protective assets, such as high quality bonds, to have the potential to decrease suddenly and dramatically in value as gold can — gold fell over 13 per cent in the last quarter of 2019 as equities moved sideways — which does make us reticent to hold it in large quantities.”

Jason Hollands, managing director at Tilney, agreed. He said Tilney had a small allocation to gold across their managed portfolios and did view it as a “de facto insurance policy” in the event of major collapse in market confidence, such as a credit crisis.

But he added: “It is important to point out, prices can be very erratic. Gold is not a steady eddy asset class and in recent years, gold prices have had higher annualised volatility than both global and UK equities.”

imogen.tew@ft.com

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