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Gold price rises chased by virus fears


According to the World Gold Council ETF holdings and assets in gold reached new all-time highs during February, adding USD4.9 billion in net inflows, with gold outperforming all major asset classes at the end of February, and being the only one in positive territory.

According to the World Gold Council ETF holdings and assets in gold reached new all-time highs during February, adding USD4.9 billion in net inflows, with gold outperforming all major asset classes at the end of February, and being the only one in positive territory.

Gold global trading volumes averaged USD195 billion a day in February, an increase of 34 per cent y-o-y, while futures open interest increased 27 per cent to USD122 billion. COMEX net longs, via the COT report, hit all-time highs of USD63 billion, the World Gold Council says.

Meanwhile, the UK’s Royal Mint, entirely owned by the UK’s Treasury, launched its first ETF in February. Jatin Patel, Head of Wealth Management, The Royal Mint says: “With global equity and commodity markets in turmoil this morning gold hit USD1,700 overnight. There is no doubt investors will be raising their allocations to gold searching for downside protection.

“We saw investors positioning themselves using the Royal Mint Physical Gold ETC (RMAU) last week in anticipation of this downside risk. On Friday we saw volumes in RMAU spike 383 per cent higher than a normal trading day.

“Investors use gold to hedge systemic financial risk and are voting with their feet by using RMAU.  This is the only European Gold ETC that custodies its gold with The Royal Mint, a non-financial/banking firm.”

Commenting on the gold price, Adrian Lowcock, head of personal investing at Willis Owen, an investment platform in the UK, says: “The next few weeks look potentially critical for investors as they watch how the spread of the coronavirus evolves, and assess what impact it is having on markets. So much is dependent of the direction and magnitude of the disease that it is hard to forecast with any accuracy how different investments will perform and investors behave.

“What we can see is the level of fear in markets is at extremes we haven’t seen since the financial crisis and there is very little financial institutions and professional investors can do or say in the short term to reassure markets. As such, if the situation escalates there is a very real possibility the gold price could continue its run over the past few months, and it could even break through the USD2,000 level.”

Commenting on the news on Monday that that the FTSE was down by over 8 per cent, Lowcock added: “There is panic in markets as the oil price collapsed on news over the weekend that Saudi Arabia will increase production and not cut it. This follows Russia’s refusal to cut production, and with the coronavirus also spreading further, investors are reacting by looking to sell everything.

“In the UK, with BP and Shell such big parts of the FTSE 100, it is particularly impacted by the dramatic slump in oil which is down around 25 per cent in a single day. The scale of the fall means the UK has entered bear market territory for 2020, and only an end to Coronavirus panic is likely to reverse its trajectory as confidence has completely evaporated.

“Difficult as it feels, investors should keep their heads whilst others lose theirs. Stay focused on the long term and do not obsess about the short term. The sell-off has and will present opportunities for investors, with some companies offering yields not seen since the financial crisis or the dot com bubble.”

Clark Fenton, Portfolio Manager of Diversified Returns, RWC Partners, agrees with Lowcock on his comments on the gold price, saying: “Gold could go through USD2,000 this year, especially post the Federal Reserve’s emergency action last week and the follow through we expect from them.

“It may look like gold has already rallied strongly, but investors have not missed their opportunity – we think it has a long way to go from here, not simply because it’s commonly viewed as a safe haven but because the world has now changed fundamentally. We’ve never seen real rates this low globally, so investors will be forced to search beyond bonds to preserve their wealth.

“It is also under-owned by investors globally, meanwhile less is being mined out of the ground as production levels are declining. If investors are looking for diversification it looks like a clear beneficiary.

“So if investors are looking for somewhere to invest amid the volatility, they should make sure they have an allocation to gold with real rates of interests at this level, and given the measures central banks are taking, especially as the policy moves could lead to a spike in inflation down the line.”

Taking a slightly different view on gold is Matthew Yeates, Senior Investment Manager at 7IM, who says: “Gold has become one of the few safe haven assets investors are happy to back amid the huge swings being seen in equity markets in the last few weeks. Conversely, since fears over the Coronavirus began in January, US 10 year rates have fallen by over 0.75 per cent – in a world where the returns from lending to the US government for 10 years has fallen so low (less than 1.1 per cent as it stands today), it doesn’t matter so much if gold doesn’t yield anything or pay dividends because the alternatives that do aren’t that attractive either.”

However, Yeates warns that holding gold in a meaningful way within portfolios can be a costly exercise over the long term.

“With no yield available, even with rates from traditional government bonds being very low by historical standards, it is still greater than the 0 per cent offered by gold.

“Even in the rush for safe havens last week gold fell when the threat of a Coronavirus really peaked, falling nearly 5 per cent between the 21st and the 28th. There’s little credible explanation but it is worth remembering gold is not a fail-safe asset when equities fall, as is often believed. From March to November in 2008 the price of gold actually fell by over 30 per cent, despite the same period representing the peak of the financial crisis.

“At present, in our core portfolios there is nothing we have seen to drive enough meaningful conviction to take a position and we retain a zero weight to gold.

“Other traditional alternatives have also struggled. Commodities have sold off significantly on demand threats and real estate has exhibited the equity market beta we know is possible. UK listed infrastructure (that we sold out of the Cautious portfolios at the start of the year) has also had a difficult period. “Traditional” alternatives like real estate, gold and broad commodities can have a place in some specific portfolios but frequently they are expensive to hold, in some cases less liquid and in our view often have a good degree of “hidden beta” that can show itself in market drawdowns, as seen in 2020 so far.

“The alternative basket we hold de-emphasises these holdings for those we think can be cheaper, more liquid and generate returns in up and down markets (as evidence in performance YTD). Holding a combination of different styles of alternatives focused on long short strategies across asset classes that aim for a low exposure (or beta) to traditional equities offers investors a credible answer to longer term diversification – especially when recent gains on bonds have seen yields fall to historical lows.” ​

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