Gold has done remarkably well this year as investors’ nerves continue to fray, and today's US presidential election is yet another macro event which could add more fuel to that particular fire.
According to data from Wilshire, gold is the top performing asset over the past 12 months generating more than 33 per cent. US growth equities have returned 29 per cent, by comparison.
We sought to figure out why most wealth managers’ allocation to gold in multi-asset portfolios is so low, despite its appealing characteristics as a safe haven asset away from the sound and fury of both equity and bond markets.
Data from Arc supports this: they found that three-quarters of the managers they surveyed had either zero gold exposure at all or less than 2.5 per cent – while no manager had an exposure above 10 per cent to the asset class. Why so low?
First, the decision to invest in gold invokes an opportunity cost to forgo a yield-producing asset for one that solely relies on capital appreciation. This opportunity cost is allayed by the fact gold itself has proved an effective store of value since it coated the door handles in ancient Egypt, so you’d think having a 5,000-year track record also gives investors some confidence.
Paul O’Neill, chief investment officer at Bentley Reid, said the precious metal helps protect portfolios against market turmoil and aggressive monetary stimulation by policymakers.
"We continue to be in the midst of a debt super-cycle, characterised by outsized government borrowing and ongoing central bank interventions," he told Asset Allocator. "The result is too much paper money being printed. In contrast, the amount of gold in circulation cannot be easily and endlessly increased."
He added that, unlike fixed income, gold doesn't carry the risk of default which is in part responsible for turning supposedly ‘safe haven’ bonds into volatile assets over the past couple of years – see for reference Liz Truss.
Another difficulty is predicting where it’ll go next.
“Calculating an expected return on gold is quite difficult as no future income can be discounted,” said Raymond Backreedy, chief investment officer at Sparrows Capital.
He said gold's inherent volatility can also put people off, but added that “risk is not exclusively about managing volatility, but also about minimising permanent loss to capital.”
Under this criteria, gold has fared very well, outperforming equities in the short-term in instances of mass drawdown.
Indeed it is very hard to imagine gold losing its value drastically, given its scarcity.
But of course, there are several ways to access this exposure beyond direct gold ownership.
Casterbridge is one of the allocators to hold an around-benchmark position of between 1 and 2 per cent, but that itself is broken down into a number of components.
One of their preferred mandates is the Cohen & Steers Diversified Real Assets fund, which invests in a basket of raw materials, gold included, that facilitate economic growth.
Head of their managed portfolios Julian Menges said both gold and silver have a role to play in the green transition, and that if gold is particularly expensive at that moment, the US-based team may rotate into other rare metals or mining stocks.
With the US election about to commence, tensions in the Middle East rising, and post-Budget jitters in the UK, we can only speculate just how much more expensive gold may become through the remainder of 2024.
