Gold hit a fresh record high on Tuesday (20 August), reaching $2,531.60 (£1,943.83) on the back of increased optimism around Federal Reserve rate cuts.
However, wealth managers appear to be less positive on the outlook for the commodity, with research from Asset Risk Consultants (ARC) finding that 75% of private client discretionary investment managers have under 2.5% gold exposure.
“The lack of gold exposure in portfolios today cannot be explained away by managers being negative on forecast returns for gold over the short to medium term,” said Graham Harrison, chair at ARC. “Indeed, net sentiment towards gold was strongly positive, at +35% in our latest survey.
“However, an investigation of the changes in net sentiment over time displayed by discretionary investment managers to gold reveals a strong correlation with the performance of gold over the previous 12-month period. Sentiment was at its most negative in the period 2012-2014 and has tended to be positive when gold price momentum has been positive.
“From a value investing perspective, there is no doubt that gold’s investment fundamentals are weak,” he added. “Professional investment managers tend to be divided on whether gold is a store of value in turbulent times but are united in the view that, over the long term, history reveals that gold is at best an inflation hedge.”
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Role of precious metals in a portfolio
Precious metals have often been viewed as a store of value and a hedge against inflation. While both gold and silver are seen as diversifiers due to their low correlation with traditional assets, Sheridan Admans, head of fund selection at TILLIT, says gold is considered the better diversifier of the two.
“Historically, gold and silver have provided a reliable hedge against inflation and have performed well during periods of US dollar weakness. These factors, combined with the safe-haven status of precious metals, particularly gold, are key reasons why investors choose to hold them as part of their portfolio.
“However, investors should be cautious; there is no such thing as a free lunch. Whilst gold and silver can provide an element of protection within the portfolio, they pay no yield and can be highly volatile in terms of price. It is important to remember gold and silver are commodities and their value is intrinsically linked to their scarcity; sharp swings in demand or supply will result in sharp swings in the price.
He adds that it is recommended to cap exposure to precious metals at between 5-10%.
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“This level can provide some reassurance that there is downside protection within your portfolio but is not so significant as to dramatically change the volatility of your portfolio or have disproportionate opportunity costs in terms of the potential income return.”
He tips both the HANetf The Royal Mint Responsibly Sourced Physical Gold ETC and the $820m Jupiter Gold & Silver fund as strategies for investors looking to play precious metals.
Jupiter Gold & Silver invests in the two metals via equities and bullion, with the allocation of the fund varying depending on how bullish or bearish the manager is.
“If the manager has a bullish outlook, the fund will hold significantly more in equities than bullion and a fairly equal split between gold and silver,” says Admans.
“Whereas if the manager has a bearish outlook, the fund tends to hold a fairly equal split between equities and bullion, and the weighting to gold tends to be higher. Most precious metal funds focus on gold mining companies. The silver and bullion factors, alongside the overall flexibility, make this fund quite unusual.”
Meanwhile, the passive Royal Mint Responsibly Sourced Physical Gold ETC is a lower carbon, physical gold product that keeps investors’ gold holdings in allocated accounts in the vaults at the Royal Mint.
“The partnership with The Royal Mint means HANetf has full control and transparency of the supply chain involved in the creation of the gold bars,” says Admans.
“This is crucially important to understanding the provenance of the gold being held on an investor’s behalf. HANetf has insight into how the gold is extracted, the treatment of the miners, etc.
“This is a unique product in that it offers exposure to gold with an ethical angle as well as the backing of the Royal Mint.”
