Is Gold now a Contrarian Play?

November 18, 2013 at 10:13


There are signs the more contrarian-minded multi-managers are moving back into gold and other precious metals. Is the sector poised for a turnaround?

Some multi-managers believe so. The Cazenove team has taken a small position in the BlackRock Gold & General fund. Manager Robin McDonald said the group believed the current level of gold-related shares relative to the price of gold was anomalous and there was potential for gold company shares to rise

Ani Markova, manager of the Smith & Williamson Global Gold and Resources fund, points out the drop in gold exchange-traded (ETF) fund holdings is approximately equivalent to 25 per cent of global gold-mining production. She adds: “The gold price is now pricing in a normalisation of interest rates. It has been hit hard since real interest rates started rising.”

The price of gold-mining shares has been hit even harder. Angelos Damaskos, manager of the Junior Gold fund, says for many companies the marginal cost of production is roughly $1,300. “Many companies were confident the gold price would continue its uptrend and mining costs have gone through the roof,” says Mr Damaskos. “[But] there have been significant labour shortages because of decades of underinvestment. Investors have sold out and driven share prices very low.”

The arguments in favour of an allocation to gold continue to be diversification and safety. “The [world’s] economic problems are not being solved,” asserts Mr Damaskos. “There is still huge debt, large budget deficits, and very high unemployment. The realistic and easy solution is to continue to print money and debase currencies to reduce the level of debt. With that outlook, investors are likely to return to safe havens.”

Ms Markova points out that gold generally has zero correlation with equity and bond markets. She also believes it looks extremely over-sold at these levels: “Gold has historically been used as a reserve asset class and those characteristics remain in place.”

But this remains a niche view, with the majority of multi-managers continuing to avoid the asset class. Managers such as James Calder, head of research at City Financial, have held gold ETFs in the past, but do not believe the current environment heralds a buying opportunity and has no exposure.

John Ventre, head of multi-manager at Old Mutual Global Investors, believes gold remains an asset class for speculators and has no direct weighting across his portfolios. Likewise, David Coombs, head of Rathbones’ multi-asset portfolios, says that as gold pays no income, it has no intrinsic value and does not favour the asset class.

The gold price has run a long way down, and gold shares even further, but while the economic environment remains buoyant, its future strength is far from assured.