PA ANALYSIS Is gold glistening

Gold returns to the headlines amid political unrest but what exactly is its role in a portfolio these days?

PA ANALYSIS Is gold glistening


Gold has returned to the headlines amid the political unrest in the Ukraine while ETFs pegged to the precious metal are seeing their long run of outflows finally coming to an end.

Crimea's impending conflict has seen equities fall off and the gold spot price spike, breaching $1,350 in the last couple of days. This is normal in times of political unrest and while many have suggested its position as a 'safe haven' have returned I struggle with the concept of any safe haven if that definition is dictated by the possibility of war.

Before the situation in Ukraine worsened, just last month gold miners soared, including an 11% rise in a single week in mid-February, according to ETF Securities – their highest spike since last August. This was said to be off the back of improving sentiment towards the gold price, but correlation between the two is not guaranteed – either negatively or positively.

The dollar has fallen off in recent weeks amid Federal Reserve stimulus and the gold price was pushed higher. As stimulus looks set to remain, does this mean bullion will be driven up further, or will it cap?

$1,000 'feels right'

$1,000 feels about right, according to Cannacord Genuity's global strategist Robert Jukes, who thinks it will likely hover around that point for the next few years. 

In any case, even if the price of gold continues to rise, demand remains – largely driven by China. After a long-continued sell-off, gold ETFs saw their first month of net inflows in February in over a year, according to BlackRock.

In its latest weekly gold report, it noted that many of the major gold miners had reported their year-end results.

Many of these showed they were taking steps to reduce capex in response to a declining gold price as well as announce impairments and future production forecasts were downgraded. Investors had been encouraged by this and the FTSE Gold Mines Index was up 22% YTD, BlackRock said.

Difficult to value

Brian Dennehy, managing director at Dennehy Weller & Co, isn't convinced, saying he would trust miners over bullion any day.

He believes the gold price is too difficult to call and says its pre-2008 role as the ultimate inflation hedge is somewhat redundant these days.

I’m inclined to agree.

Anything whose price is so sensitive shouldn’t really be used as ballast to a portfolio and its diversification benefits (in terms of correlation to equities) can be questionable.

Dennehy says: “There is so much buying and selling behind the scenes, it’s difficult to work out the value. You’re probably as well off drawing a line with a ruler as to where the price is going to go. But after a 10-year rally from a really low level we are overdue a correction – and I think $1,000 to $700 is about right.”

As the gold price has come down and gold miners have come up, this might be suggesting we are in the later stages of the gold price cycle. Many of the miners were beaten up quite badly and the measures put in place to extract new metal had to be written off as the advancing gold price stemmed demand.

But, these companies will be well-placed to take advantage and there will be a point again when they look good value, though it's difficult to say when that might be.

BlackRock seems to agree that new management teams, better capital discipline and operational efficiency will take hold demonstrating better focus on shareholder returns and, hopefully, rebuild investor trust.

I wrote recently about a return to a more ‘normal’ environment, but I think the one area that won’t be returning any time soon is the function of gold in an overall portfolio that a wise man once described to me as ‘that which you can just cuddle at night to feel safe but it doesn’t really do very much’ (thank you Justin Urquhart Stewart). I fear those days might be over.


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