Bateman, chief investment officer of multi-asset at Fidelity, said while his team never has a monthly asset allocation meeting without discussing the precious metal, it is a speculative asset, always difficult to price and therefore hard to gauge whether attractively valued.
Over the last few weeks investors have panicked and piled into gold on the back of mounting tensions between the US and North Korea. But, according to Bateman, all other things being equal, gold is only attractive when not on the receiving end of speculative inflows.
On 4 September gold spiked to a near yearly high as investors sought a safe haven amid escalating geopolitical risk.
Bateman said investors commonly buy gold as an “Armageddon hedge” but this is predominantly synthetically through exchange traded funds (ETFs) as people do not tend to stockpile physical gold anymore – and there is a risk people suddenly decide to sell their exposure.
He explained: “The funny thing is, in Armageddon an ETF that holds gold or gold futures is not going to do much good because it is still an ETF; that is not an Armageddon hedge.
“If the speculative demand is driven by massive geopolitical concern, at what point do people realise that is not the way to be buying it and they panic sell? That may not happen but there has got to be that tail risk that people suddenly think an ETF is not the way to own gold.”
Bateman said the best way to view gold is to monitor the relative flows and what is driving them, and decide whether that is a structural trend or something more irrational.
A better hedge in the current environment, he added, is oil.
“Oil is a better tail risk hedge in extreme market conditions than gold,” said Bateman. “That is because oil is needed irrespective of what happens whereas gold isn’t.”
Fidelity prefers access to gold through gold miners which he describes as a “more shrewd play” than physical gold or ETFs because they offer both exposure to the gold price and an economic return through exposure to underlying businesses.
“A mining fund that is overweight precious metals is in some respects far more attractive than buying the physical metal,” he added.
Read the full interview with James Bateman in the October issue of PA.
