The yellow metal

The recent renewed confidence in equity markets appears to be reflected in fund flows, according to the Financial Times equity funds in the US saw inflows last week for the first time in 2016. US equity funds had net inflows of just under $5bn in the week ending the 9th of March. This was in contrast to nine weeks of out flows, amounting to $46bn. The bulk of the new money went into funds investing in US equities; about one third went into International funds. Junk bond funds also attracted inflows.

One subject we have not touched upon much recently is the gold price. Unlike many commodities the price of gold has been rising. The gold price has risen almost 20% this year. Gold is an asset that one feels is akin to Marmite, there are those who love it and those who can’t understand the investment case and hate it, Warren Buffet being one of the un-believers. Fundamentally it does nothing, it offers no yield has limited industrial use and has significantly underperformed equities and bonds over the long term as an investment class.

Some investors buy gold, as they believe it offers a hedge on inflation, a theory that many economists have now discounted. Gold should become more attractive when yields on US treasuries fall, as gold is in effect a currency of its own. The idea of owning gold was probably boosted at the start of the year when fears of a US recession were begining to take hold, and Janet Yellen was asked about the possibility of negative rates. As these fears recede the gold price should do the same.

Some investors buy gold for its defensive qualities in times of high volatility, believing that should the world enter a renewed banking crisis it will offer capital protection. If savers are facing bank bail in’s, the global economy faces a recession, and governments balance sheets are under pressure gold may be the only safe place to save, would be the rational of some gold investors.

Gold backed ETF’s have attracted a record inflow of $7.2bn in February, surpassing a previous high in 2009. This could be another example of the level of fear that was enough to spur the recovery in equity prices in the past month.

Exchange traded funds have been a popular way to gain exposure to gold. The hitch is that owning an ETF is not exchangeable into the physical asset. Investors are buying a bank’s balance sheet when buying an ETF. Should a banking crisis return owning gold via exchange-traded funds may not provide the security one is looking for.

The platinum price has lagged the gold price for several years and continues to do so despite many similar properties. Platinum has one or two features that have meant the price has often traded at a premium to gold, unlike today. Platinum has industrial use, particularly in cars, and is costlier to mine. On the other hand, perhaps golds lack of industrial use makes it a more appropriate store of value for those who believe. 

Posted on March 15, 2016 .