Will the rotation into value continue in 2021?
Vincent Ropers, co-manager of TB Wise Multi-Asset Growth, talks to us today about the market’s...
The price of Gold topped $2,000 an ounce for the first time this month. Faced with a falling US dollar and a drop in real yields – meaning they could lose money on government bonds and even cash over time – investors instead turned to gold as their defensive asset of choice.
Citigroup has predicted the price could go as high as $2,300 by mid-2021, while Bank of America Merrill Lynch has said it could reach $3,000 by early 2022, alongside significant gains in other precious and industrial metals.
While gold is grabbing all the headlines, with its price having risen by some 36%* since its lows in March, the price of silver has actually more than doubled, up 127%* in the same time period.
“Gold is typically the place to be going into a crisis, due to its defensive qualities and lack of correlation to other asset classes,” commented James Yardley, senior fund analyst at FundCalibre. “By contrast, silver is the place to be coming out of one, with history showing that the price of silver can rise sharply over a relatively short period – something it has been doing recently.
“Unlike gold, silver also has some real world applications beyond jewellery. While industrial use accounts for less than 10% of annual gold production, up to 40% of silver is used in manufacturing and therefore it has more of a pro-cyclical bias. It’s also highly electroconductive and is used in electronic components for the likes of 5G telecoms networks and more and more medical applications.”
Ned Naylor-LeyLand, manager of Merian Gold & Silver fund, commented: “It is perfectly natural, in our view, that both metals should rise. The current bull market for both metals, and the relatively faster rise of silver, are fully comprehensible, given economic conditions, and are what we have been forecasting for some time.
“Recent monetary loosening, the swelling of central bank balance sheets, and the spike government in spending in response to the coronavirus, may finally have tipped investors over the edge in their distrust of fiat currencies – especially the US dollar.
“Yields on government bonds have become so low than they are unlikely to outpace inflation, [therefore] government bondholders are facing losses, in real terms. Gold and silver, by contrast, are a store of true value.”
He told us more in this podcast:
David Coombs, co-manager of Rathbone Strategic Growth Portfolio, added: “Gold has continued to be a stellar contributor to returns but, as the price of the shiny metal headed towards $2,000, we decided to trim a little and take some profits. We still feel gold has an important place in the portfolios, however, particularly in this continued environment of low and/or negative bond yields.
“We hold gold in our diversifiers bucket, and we believe the opportunity cost of gold has fallen to its lowest level in decades. With negative interest rates on various bonds, you’re actually paying some governments to lend them money! By selling these negative yielding bonds to buy gold, in a way you are increasing your income – no yield versus negative yield.
“From a strategic point of view, it is a good hedge against disinflation, a valuable benefit these days considering we think we’re in for another 10 years of disinflationary headwinds. Everyone says that gold is a hedge against inflation. It’s actually a hedge against capital destruction, which stagflation and the others do in any event.”
The Jupiter Merlin Portfolios have also invested in physical gold consistently since the onset of the global financial crisis over a decade ago. In global, multi-asset portfolios, including multi-manager ones, the managers believe it fulfils an important role in diversifying risk.
“While its behaviour may sometimes coincide with that of other asset classes, a very long history of empirical data demonstrates that its statistical correlation with them is very low,” they said. “Put simply, it behaves differently, and we believe that itself is worth paying for in a diversified portfolio, even though its price might fluctuate. As the Covid-19 financial and economic stress mounted in March, we doubled the gold holding to around 10% across the Jupiter Merlin Portfolios.”
Back in April, Ned commented: “Gold miners have found themselves firmly side-lined by active investors in recent years. Over the past two decades, gold miners’ profit margins have been under pressure, and sustainable earnings growth AWOL. The sector has had brief moments in the sun, but investors have been happy to shun it.
“Yet it is primed to become the next big story in financial markets. Gold miners are in the eye of a perfect storm. The operating environment looks far better than it has done in decades; margins are now set to increase in sustainable fashion as, along with collapsing energy (oil) inputs, gold/silver producer currencies such as the Australian dollar have fallen by 25-30% versus the US dollar.
“And for investors like us who are already invested in the sector, the potential for a major rotation in active equity portfolios, towards what has historically been an ignored component of equity indices, is a genuinely exciting development. With a firm sector tailwind, genuine and sustainable earnings growth prospects, and a dearth of opportunity elsewhere, the sector is fully dolled-up as the belle of the 2020 ball.”
And he has been proven right. Gold mining companies are up 90%** since the March lows (78%^ in sterling terms) while the wider global index is up 50%** (33%^ in sterling terms).
Vincent Ropers, co-manager of TB Wise Multi-Asset Growth fund, also told us that his fund has had a large allocation to gold equities for a couple of years, due to the fact that interest rates were falling. “But the most compelling argument for gold equities today is that these companies have the strongest balance sheets they have had for decades,” he said.
“Profitability is going through the roof as the price of gold is increasing and the costs are falling. They are also under-owned by global investors. There is also upside for silver, which behaves with a lag to gold, but when it does go up it can do so as though it is on steroids.”
Hear more about what he had to say in this video interview:
*Source: Bullion Vault, gold and silver price in US dollars, 17 March to 13 August 2020
**Source: FE Analytics, total returns in US dollars, using the MSCI ACWI Select Global Miners IMI compared with the MSCI World, 13 March to 12 August 2020.
^Source: FE Analytics, total returns in sterling, using the MSCI ACWI Select Global Miners IMI compared with the MSCI World, 13 March to 12 August 2020.