Gold is still in a secular bull trend, according to Ani Markova, portfolio manger of the Smith & Williamson Global Gold & Resources Fund (GB00B3RJHY30).
Many investors see gold as something volatile to be traded. But Ms Markova thinks it should be something to buy and hold for the long term. She points out that since 1969, gold's compound annual growth rate in US dollar terms is 7 per cent. "Investors needs to consider the asset class as a diversifier," she says. "The general trend is still upwards."
She argues that there is "limited downside risk". "The biggest argument for the asset class is that the spread between the S&P 500 and the Philadelphia Gold & Silver index is the widest it has been since the 1980s."
The fund is predominantly a precious metals fund, investing in gold, silver, palladium and platinum, alongside a 7 per cent holding in diamonds.
Historically, Ms Markova says gold has appreciated by 5-10 per cent on geopolitical tension and events. (A week after the IC met Ms Markova the gold price went up 3 per cent in a single day in response to increasing tension and conflict in Ukraine.)
She also cites research from the World Gold Council that shows gold can reduce portfolio losses during tail-risk events, when held in small amounts in portfolios.
Ani Markova CV Ani Markova co-manages the Smith & Williamson Global Gold & Resources Fund and is also co-manager for the AGF Precious Metals Fund. She has worked for AGF (a minority shareholder of Smith & Williamson) since 2003 and has been working on the portfolio since 2008. Before joining AGF, she was a research associate and prior to that an associate analyst, both positions were based in Canada. She has a BA in management and marketing from Mount Vernon College in Washington DC, an MBA in international business and finance from the US and she is a licensed international financial analyst as well as a CFA charterholder and member of the Toronto CFA Society. |
There are several other reasons why Ms Markova believes the gold price will rise.
Within two years she expects that the scarcity premium for gold will affect its price. "There have been no big discoveries," she says. "Only smallish ones of low-grade quality or in challenging locations, for example, in Africa or high up in the Andes.
"In the 1990s high-grade gold was mined out. When the gold price moved up, all peripheral low-grade deposits became economic and the costs rose. But we keep telling managers to look at their margins rather than going after low grade.
"Capital expenditure and exploration took the biggest hit last year when the gold price plummeted. The drop in exploration means gold mining companies are not replenishing resources."
For this year, she expects the cost of mining gold to reach $1,300 a troy ounce, which means the gold price will need to be higher for companies to make a profit. "I don't se us going back to the $200 gold price," she says.
Secondly, she believes that gold remains a "fundamental monetary instrument in a new economic and currency war". "We've seen massive attempts to devalue currencies, for example, the Japanese yen and Chinese renminbi. Everyone wants to get employment and exports up and the one tool governments have is currency."
She says that she couldn't believe it when Bitcoin hit the same price as gold. "Gold is a real asset. It has been used as money for such a long time," she says.
But the main buyers of gold bullion have changed. In the 1990s, jewellery took most of the gold bullion. But last year China, India and central bank buying represented 80 per cent of gold production. "The gold exchange traded fund sell-off went straight East last year," she says. "Once investors return it will not be available at low levels. Buy when China buys, I say to investors."
She says that the gold produced in China is not leaving the country because China is trying to back its currency. "China wants a convertible currency," she says. "The only way to do it is to have as much gold backing as the US dollar. Gold is one asset that governments can't control. They can't print it."
She estimates that China's central bank could have close to 3,000 tonnes of gold today, and it could take them a few years to get to the US level of more than 8,000 tonnes.
Meanwhile, Chinese people are buying more gold. "China's middle classes want quality goods such as wines and cars - and gold is part of that trend."
"In China, gold means prosperity," she says. "You see people gifting gold. Gold jewellery is popular in China. Chinese women prefer gold."
Diamonds are also following the same trend, she says. "In India and China, the tradition of the diamond engagement ring is taking off," she says. "Diamonds are easier to smuggle than gold and easier to use to transfer wealth. The stones that are less than a carat are easy to imitate or use in industry, while the larger stones are mostly going to China. But they are becoming so much rarer to find."
