As volatility has continued to rise, investors have been increasing their allocation to ‘safe haven’ assets including Gold, US Treasuries and the Japanese Yen.

All these assets have properties that investors favour in times of market stress and can become diversifiers to equities and high yielding bonds.

Within these safe haven assets, we believe that Gold and Gold producers are priced favourably and merit inclusion within our portfolios.

The key drivers for utilising Gold & Gold Producers:

1. Real Rates are priced to decline

After the more bullish nature of Central Banks at the start of the year, there has been an exceptional U-turn with many already enacting rate cuts and additional stimulus or stating they will do so. This race to the bottom is extremely beneficial to gold as the Gold Price has a negative correlation to real interest rates. As it is not a yielding asset itself, gold can underperform when yields are high and outperform when yields are lower and falling.

2. The US Dollar

Predicting currency can be a very tricky thing to do. However, long term currency trends are determined not just by trading but economic factors as well. Over the past few years, the US dollar has been particularly strong and in line with the US economy. However, many economists are now predicting that the strength of the dollar may not be as persistent; as the economy slows, trade wars continue to put pressure on growth and the US deficit expands. The US Dollar can also weaken as interest rate expectations change. With rate cuts priced in, the dollar may weaken over time.

3. Risk & Sentiment

The most important aspect of gold price appreciation is the general sentiment from investors. As markets become more volatile and economic fundamentals deteriorate, investors utilise gold for its safe haven properties. The global economy is slowing and with increasing political risks dominating sentiment, we believe there is still major upside for gold and investors will continue to allocate to it to provide some defence from these external risks.

Gold versus Gold Producers

We believe that both Gold and Gold producers are priced favourably for the foreseeable future. When deciding whether to invest in physical gold through ETCs or Gold mining shares through funds or ETFs, it has been dependent on the risk profile of the portfolio. For the lower risk portfolios, we believe an investment in physical gold provides a less volatile opportunity with a positive upside. For the higher risk portfolios where greater risk can be taken, we are utilising Gold mining shares. Gold mining shares benefit from the rising gold price plus market pricing from the underlying companies. These are priced favourably as; technological improvements, reducing costs and a greater emphasis on ESG will improve profitability leading to an increase in share price.