Despite the bullish sentiment surrounding gold’s performance, wealth managers appear to be less enthusiastic about the commodity’s future. Research conducted by Asset Risk Consultants (ARC) reveals that a staggering 75% of private client discretionary investment managers have allocated less than 2.5% of their portfolios to gold.
This apparent disconnect between the metal’s record-breaking price and the subdued exposure in investment portfolios suggests that wealth managers are not entirely convinced by gold’s investment fundamentals.
Graham Harrison, the chair at ARC, has shed light on this paradox, explaining that the lack of gold exposure in portfolios cannot be solely attributed to managers’ negative forecasts for the commodity’s short to medium-term returns.
In fact, the survey conducted by ARC revealed a strong positive net sentiment towards gold, at +35%. However, a deeper analysis of the changes in net sentiment over time displayed by discretionary investment managers suggests a strong correlation with gold’s performance in the preceding 12-month period. Sentiment tended to be most negative during the 2012-2014 period, when gold prices were relatively stagnant, and has since become more positive as the metal’s price momentum has improved.
Value Investing Perspective
From a value investing perspective, Harrison argues that gold’s investment fundamentals are weak, and professional investment managers remain divided on whether the precious metal truly serves as a reliable store of value during turbulent times.
However, they are united in the view that, over the long term, history has shown gold to be, at best, an inflation hedge, with limited potential for outperformance compared to other asset classes.
The Role of Precious Metals in Portfolios
Precious metals, particularly gold and silver, have long been regarded as a means of diversifying investment portfolios and providing a hedge against inflation. Sheridan Admans, the head of fund selection at TILLIT, highlights the key reasons why investors choose to hold these assets as part of their investment strategy.
Historically, gold and silver have demonstrated the ability to provide a reliable hedge against inflation and have performed well during periods of US dollar weakness. These factors, combined with the safe-haven status of precious metals, especially gold, are primary drivers for investors seeking to incorporate them into their portfolios.
However, Admans cautions that investors should be mindful of the potential drawbacks of investing in precious metals. These commodities pay no yield and can be highly volatile in terms of price, as their value is intrinsically linked to their scarcity. Sharp swings in demand or supply can result in significant price fluctuations, which can impact the overall volatility of an investor’s portfolio.
To strike a balance between the potential benefits and risks of precious metals, Admans recommends capping exposure to these assets at between 5-10% of a portfolio. This level, he suggests, can provide some downside protection without dramatically altering the portfolio’s overall volatility or disproportionately impacting the potential income return.
Strategies for Precious Metals Exposure
For investors seeking to gain exposure to precious metals, Admans highlights two specific investment strategies that may be of interest: the HANetf The Royal Mint Responsibly Sourced Physical Gold ETC and the Jupiter Gold & Silver fund.
The HANetf The Royal Mint Responsibly Sourced Physical Gold ETC is a passive, physically-backed gold product that aims to provide investors with a lower carbon footprint and greater transparency in the supply chain. By partnering with the Royal Mint, HANetf has gained full control and visibility into the provenance of the gold bars held on behalf of investors, ensuring the ethical and responsible sourcing of the precious metal.
The Jupiter Gold & Silver fund, on the other hand, offers a more active approach to precious metals exposure. The fund invests in both equities and bullion, with the allocation between the two varying depending on the manager’s market outlook. When the manager is bullish, the fund will hold a significantly higher allocation to equities than bullion, and the weighting between gold and silver will be more balanced. Conversely, in a bearish market environment, the fund tends to hold a more equal split between equities and bullion, with a higher weighting towards gold.
Conclusion
The record-breaking performance of gold has undoubtedly captured the attention of investors and wealth managers alike. While the precious metal’s investment fundamentals may be subject to debate, its role as a diversifier and inflation hedge remains a key consideration for many portfolio managers.
As the global financial landscape continues to evolve, the strategies and approaches to accessing the precious metals market will likely continue to evolve, offering investors a range of options to navigate the complexities of this dynamic asset class.