Gold, arguably the most popular precious metal, has produced strong returns and outperformed most assets other than equities in developed markets this year, said John Read, markets strategist at the World Gold Council.
This asset class has been historically used as an effective hedge because it is uncorrelated to other asset classes, he argued, and does not suffer the same devaluation of income producing assets.
Silver also experienced a surge in global demand last year, rising 18% to a record high of 1.24 billion ounces, creating a huge supply deficit, Silver Institute revealed in Q1.
The silver market was undersupplied by 237.7 million ounces in 2022, the institute said in its World Silver Survey, calling this “possibly the most significant deficit on record”.
Deep Dive: Not all gold has the same value for investors
Guillaume Paillat, multi-asset fund manager at Aviva Investors, noted the diversification benefits of precious metals, and gold in particular, were more potent in low growth and rising inflation environments.
“Gold has also tended to be a good shelter during periods of high uncertainty, like the Lehman Brothers bankruptcy, or more recently the Ukraine invasion,” he said.
“As with most commodities priced in USD, it will tend to perform in periods of weak US dollar, although this effect will be dampened for European based investors like us.”
Stuart Clark, portfolio manager at Quilter Investors, said precious metals also differ from other commodities, as it is not just supply and demand that can drive the price of the asset, but also other factors, such as inflation expectations or risk sentiment.
“With currently elevated geopolitical risks, uncertainty over economic growth and significant differentials in inflation expectations, we can see a strong argument for increased interest in exposure to this asset within portfolios,” he said.
‘Well-supported’ demand for gold
Near-record prices and demand for gold for almost a year have been supported by record central bank purchasing in the first half of 2023, but, as Read noted, a common concern among investors is when prices are near all-time highs, they can only fall.
However, he said that as central banks appear to be approaching the end of their tightening cycles, the likely path of the global economy suggests “we may be about to see conditions that are very supportive for both gold demand and prices”.
“When and where rates will top out and the timing and speed of the decline are uncertain, of course, but based on past performance during periods of on-hold rates and during rate cutting cycles, gold is likely to perform well,” he said.
“Although markets are increasingly pricing in a soft landing for the all-important US economy, should a sharper economic contraction occur, gold could perform even better than it has as a hedge against risk.”
BlackRock’s Olivia Markham: Gold fever
Even if central banks have to hike rates more than markets currently expect, he said gold would still be “well-supported” due to sustained demand from central banks, even in the face of these headwinds.
“The unprecedented demand for gold from central banks – which we expect will continue – will likely provide support for gold. And jewellery demand, the most price sensitive of the demand components, is likely to step up further if prices soften,” Read added.
“While the September Fed meeting minutes will be something to watch out for, there is currently little reason to expect disruption to this rhythm.”
Paillat also pointed to more structural factors supporting gold currently, such as the emergence of a multipolar world, which he said should continue to underpin strong demand from the official sector.
“This increased demand should easily balance the supply from mining and recycling. As with other mining activities, sustainability of sources for gold production need to be considered,” he added.
Portfolio allocation
One way for funds to provide exposure to precious metals is to invest in the companies operating in the space, rather than the commodity itself, as is the case for the Quilter Investors Precious Metals Equity fund.
This approach brings higher sensitivity to the gold price and greater volatility than physical gold, said Clark, but it can also add value through stock selection, such as identifying success in exploration and IPOs or mitigating some of the environmental and social risks associated with the business operations.
The Jupiter Gold & Silver fund, managed by Ned Naylor-Leyland, is a blend of gold and silver bullion trusts and gold and silver mining equities that operate in the Americas and Australia.
One of the fund’s central principles is to narrow its investment universe, understand the remaining stocks deeply through its ‘qualitative’ approach to investing, while monitoring the risk variables through integrated financial and operational modelling.
What is behind the recent gold rally?
Naylor-Leyland avoids the mining equities that, in his view, attract additional risks from being located in less than favourable geographical locations, which includes the two largest gold producers, Barrick and Newmont.
Instead, the manager favours higher quality development assets, such as De Grey Mining and Reunion Gold Corp, which have as a group been increasing their resources during this time and are “likely targets” for the major gold producers.
“The development assets are also trading on cheaper NAV multiples versus the majors and carry the potential for a premium to be paid further down the line,” he said.
“This, in our view, creates a value opportunity in the large gold and silver development assets operating in tier 1 jurisdictions.”
Fund picks
Juliet Schooling Latter at FundCalibre pointed to the Jupiter Gold & Silver fund for its “dynamism” and the manager’s willingness to alter its positioning to best suit current market conditions, offering the potential for higher returns, albeit while increasing its risk profile.
She also highlighted Ninety One Global Gold, a concentrated fund investing in gold mining companies. Although the strategy’s performance is likely to be heavily dependent on the price of gold, she said the fund is a “good option” for those who want exposure to the precious metal through mining equities.
The TB Amati Strategic Metals fund was another potential option, which invests in metals that have strategic importance to the global economy and future macroeconomic trends, such as gold, copper, nickel, silver, graphite, uranium, manganese, rare earth metals and lithium.
Schooling Latter said the strategy can act as a “great portfolio diversifier”, while tapping into “unique” investment opportunities for such metals, including the transition to a lower carbon world.
On the closed-ended side, the BlackRock World Mining trust stood out to her for its “attractive” dividend yield. In addition to investing in quoted securities, the trust may also invest in royalties derived from the production of metals and minerals, physical metals and unquoted securities.
