Gold moving with shares rather than the reverse

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SIMON BROWN: I’m chatting now with Tim Acker, portfolio manager, the Allan Gray Equity Fund. Tim, appreciate the early morning time.

We have war, we have inflation, we have bond yields globally at multi-decade or in some case all-time highs. This should be a perfect situation for the hedge environment around gold. Instead it seems to be acting more as a risk-on asset. It is not doing what one would normally expect gold to do, which is, I think, perhaps a warning for investors.

TIM ACKER: Yes. Good morning and good morning to the listeners. You are 100% right. So if we wonder why people historically own something like gold, typically it holds its value quite well when other assets are down. When markets are falling, it’s a hedge against inflation.

It’s typically seen as a store of value when people lose trust in a currency or in governments, and lately that’s the argument people have been using – a loss of confidence in the US dollar, independence of the Fed, these kinds of arguments.

But then, as you point out, one would expect if there’s a war the gold price would be going up. But actually the gold price is lower than where it started this year.

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SIMON BROWN: And that has implications. The big one – we saw it last year – is where the local market had a spectacular year. That was on the back of gold and PGM miners. We’re now seeing the inverse this year. Gold Fields, AngloGold Ashanti – these are all sort of 30%, 40% off the highs from earlier in the year. It’s a tough time for investors.

TIM ACKER: Yes. As you point out, many of these gold and platinum shares have more or less halved this year from their peak around February.

Something that was worrying us last year is yes, there are all these bullish long-term arguments for gold, but there has definitely been an increase in just general speculation and buying by investors of both gold and platinum – in addition to central banks also buying gold.

Any idea that’s a good idea can be taken too far right and at some point becomes a bad idea. So if there’s just too much speculative activity, that always makes us a little cautious.

We were taking profit in gold last year and this change in correlation, which seems like a technical thing, just means that gold is moving with shares rather than in the opposite direction. As it is a hedge definitely makes it less useful in a portfolio as a protection tool.

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SIMON BROWN: That was going to be my next point, because gold has a purpose in a portfolio. To your point, it’s a hedge, sure. I might get some return from it, but its focus is on that hedge.

Is there still opportunity here, or is this maybe an unanswerable question? Is gold fundamentally broken? Does it go back to its hedge status? How are you viewing that at Allan Gray?

TIM ACKER: We still think there’s opportunity in gold; we still think it does serve a purpose. But the size of the portfolio I think is really the critical question.

It’s one thing to say: ‘I’ve got this hedge in my portfolio. It protects against something really bad happening. It’s maybe 5% of my portfolio, maybe 10% of my portfolio, in case something bad happens.’ But then it’s a very different thing if gold and platinum become close to a third of your portfolio, as it has in the All Share Index.

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Earlier this year gold and platinum shares made up about a third of the index. Now it’s dominating your return, and the volatility you’re getting from that movement every day in the gold and platinum prices is moving your portfolio, sort of swinging it up and down.

That we think is a little bit of a dangerous situation, so we’ve definitely been trimming those positions and saying we still want to own gold, but just at a much smaller position size.

SIMON BROWN: I get you. Back to sort of classic portfolio construction, which is the heart of it, is diversification and managing that part of the process.

We’ll leave it there. Tim Acker, portfolio manager, the Allan Gray Equity Fund, appreciate the early morning time.

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