When stock markets plunge and the world economy is threatened, one asset normally worn around rich people’s necks has its moment to shine in the spotlight.
Step forward gold, considered by many as a safe haven in stormy times.
In recent weeks, as markets worldwide have corrected sharply and a full-blown trade war between two of the globe’s powerhouses – the United States and China – looks increasingly likely, the gold price has rallied.
Shining in the spotlight: Gold is considered by many as a safe haven in stormy times
From a year low in August of $1,180.40 an ounce, it rose to $1,233.85 by the end of last month before falling back slightly and then rising again to $1,232.
Although the price remains lower than it was this time last year, there are some investment managers who now believe gold has a key – if minor – role to play in putting together a diversified portfolio.
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One such individual is David Coombs, head of multi-assets at investment house Rathbones. Normally sceptical of gold as an asset class, he has built a three per cent holding in the £532 million Rathbone Strategic Growth Portfolio that he manages – a fund aiming to provide investors with returns in excess of inflation. It does this by investing in a broad range of assets including equities, bonds, private equity and commodities.
‘My long-term view on gold has not changed,’ says Coombs. ‘If you like it, wear it and don’t invest in it. Gold provides no income which is a big ‘no no’ for many investors, especially when interest rates are on the rise and cash and bond yields become more attractive.
‘But given the uncertain times we are currently living through here in the UK with all the speculation over Brexit, I do believe it has a role as a hedge.’
Personal Assets currently has eight per cent of its assets in solid gold
According to Coombs, the hedge is against the threat of ‘stagflation’ [economic stagnation combined with inflation] triggered by a Brexit deal not being done.
‘The UK economy is vulnerable to stagflation if a Brexit deal is pushed out,’ he explains. ‘Businesses will stall on capital investment projects and we could see UK economic growth slow and unemployment rise with inflation persisting – the ingredients for stagflation. If that happens, gold will represent a store of value.’
Although a pessimistic voice (a view not shared by investment guru Neil Woodford), Coombs is not alone in looking at gold as an asset diversifier.
Investment trusts Personal Assets and Ruffer both have exposure to gold. Like Coombs’ fund, both Personal Assets and Ruffer are broadly diversified and are designed to maintain the real value of investors’ holdings. Personal Assets currently has eight per cent of its assets in solid gold (bullion) while Ruffer has seven per cent exposure through shares in gold mining companies.
Jason Hollands, of wealth manager Tilney, says some of the portfolios it runs for private clients have around two per cent exposure to gold. He says: ‘We do not see gold as a low-risk asset per se. Gold prices have at times endured long losing streaks and out of the last five consecutive 12-month periods, four have seen the gold price fall. ‘Also, a strong dollar is not good for gold because it means the currency is seen as a safer haven. Indeed, a strengthening dollar is often accompanied by a weakness in the gold price.
‘Our reasoning for holding gold for clients is as an insurance policy in the event of a collapse in confidence in the financial system. Like most forms of insurance, it will only kick in as a driver of returns in exceptional circumstances.’
For investors, there are a number of ways to get gold exposure.
The cheapest and most straightforward approach is to buy an investment that tracks the gold price. These are called exchange traded funds and are provided by the likes of iShares (part of asset manager BlackRock) and Invesco. They can be bought through a stockbroker and most fund platforms.
Purchases will incur a dealing charge and there will be an ongoing annual fee on the fund. For example, iShares Physical Gold has a fee of 0.25 per cent.
An alternative approach is to buy a fund with limited exposure to gold – such as Personal Assets, Rathbone Strategic Growth or Ruffer. Or more targeted funds such as BlackRock Gold & General and Ruffer Gold.
With the exception of Personal Assets, these funds invest in the shares of gold mining companies rather than physical gold. Companies such as Randgold Resources and Fresnillo – both components of the FTSE 100 Index – and further afield Australian-based Newcrest.
Duncan MacInnes, investment director at Ruffer, believes there is a strong case for investing in gold mining shares rather than buying a fund tracking the gold price.
He says: ‘Over the past 15 years the gold price is up by some 110 per cent. Yet mining-related equities over the same period have fallen in price on average by 30 per cent.’
He adds: ‘Gold companies are cheap and unloved. The economic backdrop could develop favourably for gold, or the market at some stage could reappraise the value of gold mining companies.’
MacInnes says the proposed merger of Randgold Resources and Canadian-based Barrick Gold – ‘a totemic deal’ – could herald a bout of industry consolidation, leading to lower costs and more profits for shareholders.
Finally, physical gold (bars and coins) can be bought from an online bullion dealer – the likes of Goldcore and Bullion Vault – or the Royal Mint. Buyers can ask to have it stored, for a charge, or delivered.
With Christmas in mind, Royal Mint is offering the gold ‘cracker’ set – six crackers hiding between them a one-ounce bar, three gold coins, a silver money clip (with a gold half sovereign) a gold diamond necklace and gold cufflinks. All for a mere £5,000.