‘Safe haven’ asset starts year strongly

Financial Times
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FT AdviserBy Ellie Duncan | Published Mar 30, 2015

Diverse sources of demand suggest gold has not yet lost its lustre for investors.

Gold has always had a reputation as a ‘safe haven’ asset, meaning investors could generally rely on the commodity to generate returns during times of crisis when returns from other asset classes react negatively.

According to figures from the World Gold Council, demand for the metal picked up in the fourth quarter of 2014, up 6 per cent year on year to 987 tonnes, boosted by demand for jewellery and central bank buying.

Daniel Fisher, director at Physical Gold, explains: “In sterling terms last year I think [the return from gold] was around 5.89 per cent, which was modest for gold, but if you compare it to some of the other asset classes it’s still one of the best performing. Gold still beat equities and cash and it also outperformed inflation.”

Marcus Grubb, managing director, investment strategy at the World Gold Council, also points to innovation in the industry.

“What’s particularly notable about 2014 is the striking shift in physical gold demand from west to east is now being followed by gold infrastructure development in Asia,” he explains. “New products and trading platforms were introduced, like the Shanghai Gold Exchange International Board, the ‘Gold Send’ mobile app in Turkey and the new kilobar contracts in Singapore and Hong Kong – all designed to make gold more accessible to greater numbers of buyers in the east.”

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But the commodity could be in for a bumpy ride this year, as gold typically suffers when the US dollar is on the rise.

Mr Fisher elaborates: “I think always the main driving force for gold is the US dollar. So if we’re looking at a recovery in America – whether it’s on the jobless front or the strength of the dollar – then that will push the underlying gold price down and hold that back.”

That would mean another “modest return” from gold this year, something James Sutton of the JPMorgan Natural Resources fund notes by the fact its price has since fallen back following a strong start to 2015.

“This is in part due to expectations of an imminent US interest rate rise, which have been reinforced by robust US jobs data,” he says. “Gold equities have given back some of the outperformance they achieved in January.”

Michael Hulme, who manages the Carmignac Commodities fund, believes investors are caught between fearing that quantitative easing (QE) will wipe away the value of their savings, in which case gold is a “store of value in times of crisis”, and concerns around deflation, which he says have “taken some of the shine off the yellow metal”.

Mr Hulme goes on: “What does look interesting and encouraging for gold is that we have another round of QE. We have some instability in Europe that tends to provide support for gold prices.”

While gold may not be the commodity of choice for every investor, there are clearly some who still see it as a safe haven asset, particularly in a global environment where political and financial risks are apparent.

John Mulligan, director of communications at the World Gold Council, reasons: “Over the coming year we should not ignore the recovery in the western jewellery markets and the continued and substantial demand from European private investors. These diverse sources of demand underpin gold’s virtues as an asset and the much needed balance it can bring to a range of portfolios.”

Ellie Duncan is deputy features editor at Investment Adviser

EXPERT VIEW

Chris Beauchamp, market analyst at IG Group, on gold:

“If the Fed raises rates in 2015 – and that is not a certainty yet – then I don’t expect much good will come of it where gold is concerned. The metal has only woken up to a rising dollar relatively recently, in January, but since then the reaction has been dramatic.

“Assuming a tightening cycle kicks off later in the year, the downward pressure on gold is only going to increase. Faced with Treasury yields that might at last be on the rise, gold’s lack of yield puts it firmly in the shade. The longer the price remains below $1,200, the more I expect it to head closer to the magic $1,000 mark.”

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