Out of favour in recent years, most recently due to market uncertainty over an impending US interest rise, the gold price hit a three-month high on 18 May of $1,232.20 per ounce.
While it may have dropped slightly to $1,211.18 (as of 20 May), Scott Baikie, TMI senior portfolio manager, believes that the current state of the market could serve as the catalyst for further upward movement.
“Gold is something that we have not gotten involved in historically,” he said.
“There has been a three to four-year sell-off, gold is not very well liked, and if you have had it during that period it has been very painful to hold. But given what is happening, we are watching the market carefully.
“We are not expecting gold to hit $2,000 per ounce by the end of the year. However, we do think that if there is any kind of shock to the markets, or the huge amount of quantitative easing that is going around the globe continues, then the price of this finite asset may begin to reflect that.”
While Baikie acknowledged that the mining trade is experiencing some issues, both long and short-term, he believes that there are stock valuations which reflect the risks.
“The is clearly deflation in commodity prices, but the miners are doing quite a job in offsetting that in terms of CAPEX and binning projects,” he said. “The headwind for companies has further to go, but there are some opportunities in selecting direct equities, such as servicing companies that provide conveyor belts etcetera.
“Reinvestment is becoming a bigger component of dividends, and you have to be wary regarding mark to market account commodity prices and sustainable those dividends will be on a cash basis. If there is continued deterioration and deflation in commodity prices dividends may come into question.
“Things can certainly get worse, but when that kind of sentiment is known by investors then the downside risk is reduced.”
But with the dollar having hit a three-month high against the euro on 20 May, boosted by positive US housing data and the possibility of Greece missing a payment to the International Monetary Fund, Norbert Rücker, head of commodities research at Julius Baer, is more concerned.
“Currency crosswinds continue to weigh on commodity prices as the dollar bounce confirms,” he explained. “We are bearish view on gold. Commodities are not an asset class to own for the time being as broad-based cost deflation should keep prices lower for longer and the equity bull is still intact.
“The dollar firmed and commodities weakened after the release of solid US economic data once more revealing the negative relationship between the asset class and the greenback. Gold received additional headwinds related to the rate outlook speculation such solid US growth data fuels.”
However, Baikie’s interest has been sufficiently piqued to warrant the possibility of a TMI foray into the precious metals trade.
He expanded: “We would want to have it in the portfolio as an uncorrelated hedge, using an asset-backed ETF to provide something that might move a bit differently to the assets – equities, bonds and alternatives – that have been going up for the past five years.
“We would likely access the market through a physically-backed ETF, such as ETF Securities Physical Gold, or a mining equity fund, which offers a finer degree of uncertainty. Mining stocks are continuing to sell off despite the gold price going up, but mining funds are leveraged plays and we might prefer to get our exposure in a more measured way.”
