(Kitco News) – Even as equities stumble, macroeconomic fears mount, and gold outperforms all commodities and most other assets with 16% gains in 2024, the overwhelming majority of portfolio managers still have small to non-existent exposure to the precious metal, the latest data from Asset Risk Consultants (ARC) shows.
According to the latest quarterly ARC Market Sentiment survey, 75% of the 83 managers who responded had either no gold exposure or a weighting less than 2.5% within their typical ‘steady growth’ investment solution. Not one manager had gold exposure above 10%.
Graham Harrison, chairman of ARC, said this lack of gold exposure cannot be explained by managers being negative on forecast returns, with net sentiment towards the yellow metal reading strongly positive at 35% in its latest survey.
“However, an investigation of the changes in net sentiment over time displayed by discretionary investment managers to gold reveals a strong correlation with the performance of gold over the previous 12-month period,” he said. “Sentiment was at its most negative in the period 2012-2014 and has tended to be positive when gold price momentum has been positive.”
“From a value investing perspective, there is no doubt that gold’s investment fundamentals are weak,” Harrison said. “Professional investment managers tend to be divided on whether gold is a store of value in turbulent times but are united in the view that, over the long term, history reveals that gold is at best an inflation hedge.”
Harrison noted that while gold prices have risen 570% since December 2003, global equities have seen a 610% total return, and gold as an asset class has been far more volatile.
“There is an old adage, first attributed to Benjamin Graham, a value investing pioneer, that over shorter periods the stock market is a voting machine but over the longer term it is a weighing machine,” he said. “In other words, over the shorter term, sentiment dominates but over the longer term, fundamentals drive relative asset performance.”
AJ Bell Investments Director Ryan Hughes said of the ARC findings that while they do include gold among the asset classes they model for potential inclusion in long-term strategic asset allocation, the yellow metal has yet to make it into their portfolios.
“In our long-term modelling, we assume an expected return in-line with inflation and as a result, our optimisation process has not judged gold as an asset class worth including on a long-term basis,” he said. “That said, it is an asset class that we follow and it can be used tactically if we decide to do so.”
“The more recent rally seems to be driven by Chinese central bank purchases rather than any real ‘retail’ demand as China looks to reduce its exposure to US dollars in its reserves,” he added. “We will watch with interest if this demand broadens out further from here.”
Chris Metcalfe, Chief Investment Officer at Iboss, acknowledged that gold has been their best-performing asset over the last three years, adding that the precious metal continues to benefit portfolios because of its diversification advantages.
“In the first 15 days of July, the gold miners we own were up close to 15%, which has benefitted performance overall,” he said. “We still maintain that there is much more value to come in gold.”
“This asset class traditionally performs poorly in a higher interest rate environment because it doesn’t yield anything,” Metcalfe added. “Despite this, the price of gold keeps setting record after record, and this is because of the different dynamics at work with the central bank buying.”
