For a few paragraphs the Financial Times stops sneering at gold


Tumbling Bond Yields Kindle Investor Demand for Gold

By Henry Sanderson
Financial Times, London
Friday, July 19, 2019

Colleagues used to ask Jim Luke why he had so much faith in gold -- a metal that just sits in portfolios, offering no income.

"People involved in gold often get accused of being 'goldbugs,' or being cranks or eccentrics," mused the Schroders fund manager, based in London. "I’ve had people ask me, ‘isn’t it odd to have such faith in an inert metal that gives you no yield and has little functional value?'"

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Not lately, though. These days, the conversation is changing as fears rise about the fate of the global economy and bond yields continue to fall — pushing the total amount of bonds that provide a negative yield to almost $13tn by the latest count, up from $6tn in October, according to data from Barclays. The correlation between the growing volume of negative-yielding bonds and the rising value of gold is striking.

In normal times buying gold means investors miss out on earning interest on other assets such as bonds and stocks, the so-called "opportunity cost" of buying the precious metal. "Holding gold in a meaningful way within portfolios can be a costly exercise over the long term," said Matthew Yeates, a fund manager at Seven Investment Management.

But tumbling yields have erased that problem, at least for the time being.

Gold is increasingly seen by investors as one of the few solid hedges against the possibility of a US slowdown, analysts say, particularly amid growing expectations that further rate cuts by central banks will fail to lift global growth.

"Gold as a zero-yielding asset will look even more attractive versus an asset that is guaranteed to lose money," said Paul Wong, a former senior portfolio manager at Sprott Asset Management.

Investors have turned to gold instead of bonds to protect against any downturn in the US stock market as it continues to hit record highs, according to George Milling-Stanley, head of gold strategy at State Street Global Advisors.

"The best news in financial markets is the extraordinary performance of the US equity market, but it’s also the thing that makes me wake up at three in the morning sweating," he said.

"The bond market is not acting as a reliable hedge against equity weakness in the way that everyone expected it to and it hasn’t operated that way since 2008. Gold is providing better protection against potential equity weakness right now than bonds are."

Billionaire hedge fund founder Ray Dalio said in a LinkedIn post on Wednesday that in a negative yield environment it "would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio."

Having languished between $1,050 and $1,375 a troy ounce for five years, gold broke through that barrier to hit a six-year high above $1,400 in late June.

That move higher has been sustained by inflows into gold-backed exchange traded funds, which rose to a five-year high of 74 million ounces of gold last week worth $105 billion. That is 17.7 million less than an all-time peak of 92 million ounces of gold held by ETFs in 2011, at the height of the eurozone debt crisis.

"Brokers who three months ago struggled to get clients to pick up the phone to them on gold are now filling rooms with interested participants," said Mr Luke.

A further rate cut by the Federal Reserve this month, as expected by the market, could add support to gold, by further lowering bond yields and weakening the dollar, according to Singapore’s OCBC Bank. A strong dollar is normally bad for gold because it makes it more expensive for buyers in other currencies.

Gold could rise to $1,500 a troy ounce by the end of 2019, the bank said this week.

Still, investors in gold do have to either pay a management fee to buy gold-backed ETFs or storage costs to a vault to hold physical gold bars.

Robert-Jan van der Mark, co-manager of the Kames Global Diversified Growth Fund, said he preferred US Treasuries as a safe haven because their price volatility was lower than gold and it was not necessary to pay storage costs.

"We would like to be rewarded for the higher level of risk and the storage cost drag [of gold]," he said. "For now we maintain a preference for the US Treasuries, as the safe and diversifying building block in our portfolio ... at least until real rates turn negative by a significant margin."

But among gold fund managers, at least, that view holds little truck.

"Long term, holding gold is less about faith in gold itself," said Mr. Luke at Schroders, who co-manages the Global Gold fund, which is up by 31 per cent this year. "[It’s] more about lack of faith in other things, most obviously faith in the sustainability of equity market valuations and more importantly faith in the ability of central banks to maintain monetary order."

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