By Jeff Prestridge
Gold had a good year in 2019. A very good year as Frank Sinatra once sang. In dollar terms, it was up in price 19 per cent.
Priced in pounds, it rose by 15 per cent, finishing the year at a tad over £1,157 an ounce. It’s the fourth consecutive year that gold prices in sterling terms have risen.
Yet, according to investors and some financial experts, gold has further to go – much further, even. They believe 2020 should be another excellent year for an asset that many consider a safe haven – in both calm and stormy times.
An asset that most experts insist should always be considered by investors looking to build a broadly diversified investment portfolio, sitting alongside other long-term investments such as equities, bonds and property.
This is despite the fact that, unlike other assets, gold is non-income producing. It’s all about the price with gold – it rises and you win, it falls and you lose.
The latest poll conducted by precious metals dealer BullionVault suggests that confidence to deliver strong price gains this year remains sky high. Nearly four in five of BullionVault’s clients believe that gold prices will rise by more than 10 per cent in 2020 – the most bullish its investors have been about gold for three years.
Indeed, one in six investors are even more exuberant about the prospects for gold, predicting gains of 30 per cent in the next 12 months.
Of course, you would expect precious metals investors to talk up an asset they have a financial interest in. But BullionVault’s clients are not exclusively gold investment fans.
Indeed, they typically hold no more than 10 per cent of their investments in gold – and one in five believes that global stock markets will perform better than gold this year.
Adrian Ash, director of research at BullionVault, says the main drivers of rising gold prices last year were strong investment demand and big purchases by central banks.
These factors mitigated the impact of reduced gold jewellery purchases in China and India as a result of a slowdown in economic growth and consumer spending there.
But this year, he believes that ‘fear’ will drive the gold price even higher – resulting from potential geo-political and global economic risks such as rising tensions between the US and Iran.
He says: ‘Yes, gold and equity prices, especially in the United States, rose last year. But history shows that gold also does well when other assets suffer – and financial markets now face a raft of worries.
‘From potential conflict in the Middle East, President Trump’s impeachment, continued trade issues between China and the United States, the UK and Europe, through to the possible fracturing of Nato and the growing challenge to the West from both Russia and China.’
He adds: ‘November’s US Presidential election could well bring a surge in financial risk. Indeed, money managers are already betting on a Wall Street sell-off and an accompanying jump in gold prices to $2,000 or even $3,000 an ounce.’ To put these figures into perspective, in dollar terms, gold finished 2019 at $1,523 an ounce.
A more sanguine – but supportive – view comes from David Coombs of investment house Rathbones. He is head of multi-asset portfolios at the London based investment firm, responsible for deciding the asset mix of various key funds.
He admits that as an investment manager, gold has rarely held any allure for him because it does not generate an income. But since late 2017, he has changed his mind – as ‘abnormal times call for abnormal investment decisions’.
As a result, some 4.7 per cent of the £600 million fund Rathbone Multi-Asset Strategic Growth Portfolio he manages is currently invested in commodities – with the biggest holding via a stock market listed exchange traded company (iShares Physical Gold) that tracks the price of gold.
Coombs holds gold in the fund not primarily because of potential geo-political risks around the corner – although like Ash, he admits they are ‘not in short supply’. It is more a result of low interest rates – in the UK, across Europe and especially the US.
He says negative interest rates on some 10-year Government bonds in countries such as France, Germany and Switzerland mean the ‘opportunity cost’ of gold has fallen to its lowest level in decades.
By selling negative-yielding bonds to buy gold, you are effectively increasing your income, he argues.
Yet more important, adds Coombs, is the direction of interest rate travel in the US. He explains: ‘Over the long term, the price of the shiny metal usually moves in the opposite direction to US interest rates. So when times are good, there’s confidence in the economy and interest rates are increasing. Investors then don’t need gold.
‘But when uncertainty hangs over the US economy, and already low interest rates are cut further, investors look to gold for shelter. And that’s what happening now. The Federal Reserve, the US’s answer to the Bank of England, is creating a supportive environment for gold.’
He concludes: ‘From a strategic point of view, gold is a good hedge against disinflation, a valuable benefit these days considering that I think we’re facing long term disinflationary headwinds.
‘Everyone says gold is a hedge against inflation, but it is actually a hedge against capital destruction. In these abnormal times, we see gold as a good store of value.’
Coombs’ thoughts are echoed by Bill Dinning, chief investment officer at Waverton Investment Management. He adds: ‘One reason why many investors have historically thought gold unattractive is that it costs money to store – around 0.2 per cent per annum to store a one kilo [35.27 ounce] bar of gold.
‘But for much of the last five years, it has been cheaper to store gold than it has been to lend money to many Western governments. So, it makes gold a more attractive component of a diversified portfolio.’
Wealth readers who wish to hold gold in their portfolios can do so in many ways. They can purchase the physical metal through merchants such as Baird & Co, BullionVault, Sharps Pixley, The Gold Bullion Company, Arabian Pure Gold, The Royal Mint and Spink.
For example, the purchase of £10,000 of gold online through BullionVault will cost 0.5 per cent initially, plus 0.36 per cent per annum to store. If sold after a year, the sales fee would be 0.5 per cent. Total fees of around £136.
A one-ounce minted gold bar (bullion) from Royal Mint currently costs just over £1,191. It will be delivered free of charge although Royal Mint offers buyers the choice of having the gold stored securely at its vaults. On gold worth £10,000, the annual vault charge would work out at about £120, although it could be higher if gold prices are rising.
Gold bullion can also be bought from the Royal Mint and then held inside a self-invested personal pension – or a small self-administered pension scheme, used by some company directors for financial planning.
This means that £100 of gold purchased by a basic rate taxpayer for their SIPP will only cost £80 because of pension tax relief at 20 per cent, while for a higher rate taxpayer, it will only cost £60.
The gold must be held in Royal Mint’s vaults – further details at royalmintbullion.com. Not all providers of SIPPs or SSASs will accept physical gold as a holding, so check beforehand.
Rather than buy physical gold, investors can buy a stock market listed exchange traded company whose performance tracks the gold price. All fund platforms allow investors to buy these shares.
For example, Interactive Investor includes iShares Physical Gold among its list of top ‘super 60’ investments. The fund’s annual charge is a competitive 0.25 per cent. Funds can also be bought that, instead of investing in physical gold, buy shares in gold mining companies – as well as other mining businesses.
They include investment funds BlackRock Gold & General, Charteris Gold & Precious Metals, MFM Junior Gold, Merian Gold & Silver, Ruffer Gold and Smith & Williamson Global Gold & Resources. Investment trusts include BlackRock Energy & Resources Income.
None of these funds tracks the price of gold. But if gold prices move ahead, invariably they perform well.
Funds such as Rathbone Multi-Asset Strategic Growth Portfolio and investment trusts Ruffer and Personal Assets also have part of their assets in gold – gold bullion in the case of Personal Assets.
Investment trust Ruffer currently has some seven per cent of its assets invested in gold shares, mainly via a holding in sister fund Ruffer Gold.
Duncan MacInnes, a director at Ruffer, says his company currently prefers gold equities rather than gold bullion because they provide the opportunity to make enhanced returns if the gold price keeps moving ahead.
He adds: ‘After a brutal bear market, many mining companies are back on their feet and delivering good cash flow at current gold prices. The industry is consolidating around the better management teams, exploration spending is subdued, so supply should remain reasonably constrained.
Demand for gold from central banks is a positive development.’ In summary, MacInnes says: ‘In a world of expensive assets, where the safest assets such as government bonds are the most expensive, we think gold is a rare beauty. It can be a portfolio hedge AND make you money.’
Source: This is Money
