Gold shines out among safe havens ahead of vote

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As we await the outcome of the EU referendum, uncertainty is in the air in the UK.

If this was not enough to lift gold inflows, alternative safe haven assets are losing their lustre. Flows figures show rotation out of equity funds amounting to $3.3bn (£2.2bn) and high yield bond funds ($3.2bn) into precious metals, which saw $1.1bn of inflows in the week before the EU vote.

Hargreaves Lansdown senior analyst Laith Khalaf says: “Your traditional safe havens are gold, bonds and cash. If you’ve got bonds and cash yielding less for longer, which looks like it’s going to be the case, gold looks relatively attractive in comparison.”

Khalaf says even if the UK votes to remain, the slowdown in China, weaker than expected economic data out of the US, and the dovish tone of central bankers is likely to support a flight to safety.

Already this month gold prices passed $1,300 an ounce after the US Federal Reserve kept rates on hold, following poor jobs data and uncertainty around the upcoming EU vote. Gold miners saw an even better rally. Coeur Mining, Yamana Gold, and Kinross Gold have rallied more than 25 per cent in June alone.

Old Mutual Global Investors Gold and Silver fund manager Ned Naylor-Leyland owns gold and silver mining stocks, as well as bullion funds in his fund, which launched in March. As its base case, the fund holds 35 per cent each in gold and silver equities, and the remaining 30 per cent in bullion. 

Naylor-Leyland says: “Physical gold is a currency alternative and a genuine flight to safety asset class. It’s like an insurance class. And the mining equities are generally a geared play on the price movement of the underlying metals.”

For exposure to gold, head of investing at Axa Wealth Adrian Lowcock recommends the ETFS Physical Gold fund, which tracks the gold price less transport, insurance and storage costs.

In the gold miners space he recommends Evy Hambro’s BlackRock Gold and General fund, but says gold miners do not have the safe haven characteristics investors might be seeking from gold. Gold miners have gone through a “massive transformation” recently, says Lowcock, having failed to track the gold price in the last rally owing to poor management.

The JP Morgan Natural Resources fund, which invests in equities, has been “adding a bit of risk and a bit of beta” says portfolio manager James Sutton. It has done this through some smaller cap holdings, like Oban Mining and Eastern Goldfields in the first half of this year, and Canadian miner Kinross in the large cap space.

Sutton says gold has been the “stand out performer” in the commodities rally this year. He says: “As generalist investors began to see the dollar roll over they became more bullish on commodities, and on gold in particular because it is the most sensitive to dollar weakness.

In multi-asset, Investec Asset Management fund manager Philip Saunders says the firm’s “gold-agnostic” funds have had around 5 per cent allocated to the asset via exchange traded funds for the first half of the year, adding it has “unfortunately” not had a position in gold mining shares. Saunders describes the fund’s current exposure as “modest” compared to highs of around 7 per cent in 2013, but it has had “quite long periods” with zero exposure.

Saunders says: “The best environment to own gold is when you think there are rising inflation risks, the second best environment is when you expect financial collapse, and the third is when you think countries like India and China are doing well, which basically introduces jewellery and wealth preservation demand.”

Tilney Bestinvest allocated to physical gold via ETFs across its multi-asset portfolios for the first time ever in October, benefiting from this year’s rally.

Your traditional safe havens are gold, bonds and cash. If you’ve got bonds and cash yielding less for longer, gold looks relatively attractive

Chief investment officer and fund manager Gareth Lewis admits some previous scepticism about the asset class. He says: “We are living in fairly extraordinary times. Over the past three or four years excessive money printing has increased the correlation of asset classes. It was a case that gold had become relatively uncorrelated.”

Portfolio weightings are “relatively cautious”, according to Lewis, with slightly higher cash weights and overweight in sovereign debt, US treasuries and gilts, alongside physical gold ETFs.

But Liontrust multi-asset manager John Husselbee thinks investors were overly pessimistic at the start of the year. “Gold can serve you with an inflation hedge, which at the moment is better served by index-linked bonds, which also provide some income.”

Liontrust’s multi-asset portfolios do not have direct exposure to gold, but higher risk funds have an allocation to commodities ETFs.

The asset class is best understood being valued relative to the depreciation of different currencies, says Naylor-Leyland. “The large amounts of cash that wash around in the cash and fixed income markets are looking at gold as an opportunity cost.” 

For those who cannot stomach gold as an asset class, Lowcock recommends absolute return strategies or cash. “Government debt tends to be another safe haven asset. The trouble with that is given where yields are there’s an increasing risk. You’ve got negative rates in Europe and Japan and you’ve got very low rates in the UK and the US.”

He recommends the capital preservation strategy run by Iain Stewart in the Newton Real Return fund, or the Standard Life Investments GARs fund, despite wobbles earlier in the year.