Fund Managers Buy Gold, But Silver Set to Outperform

In mid-2018, we reported hedge fund managers had upped their short bets against gold to all-time highs. And for retail investors, an ongoing allocation to the precious metal is prudent. That’s especially true in the current market environment – as proved by the multi-asset fund managers getting in on the act.
After a strong recovery from 2016 lows, last year was one of headwinds for the gold price. A stronger US dollar, in which the metal is quoted, and continuation of the US Federal Reserve’s interest rate hiking programme combined to send the price down 11% in the year to mid-August.
But since mid-November’s $1,209 level, it has rallied 8% to a six-month high. That has been led by the about turn in Fed monetary policy which has seen expectations of rate rises in 2019 fall dramatically.
Meanwhile, demand from investors as a safe haven asset, uncorrelated with equity prices, has improved. Current geo-political risks, combined with fears of a global slowdown, have pushed many towards gold.
In the year to 31 January, the Commodities: Precious Metals Morningstar category was the sixth most-popular with European exchange traded fund investors, who pumped in almost €4 billion. Physical gold ETFs from Xtrackers, iShares and ETFS saw significant inflows.

Research from ETF provider WisdomTree on short & leveraged exchange traded products claims investors’ bullishness on gold in January is at a record high.

Gold as a Diversifier
Gold finally started acting as a diversifier in the final three months of 2018, says Maurice Harari, senior multi-asset portfolio manager at SYZ Asset Management. Its 7.5% rise in the fourth quarter was in stark contrast’s 13.5% fall.
In early December, those hedge funds that had been short gold turned long in early December, according to Saxo Bank.
“It started to hedge portfolios and nowadays it is very difficult to find real diversifying assets,” explains Harari, who added gold to his portfolio in September and now has between 6-10% exposure.
The argument for retaining exposure in one’s portfolio for a gold allocation continues to be its role as insurance for falls in equity and/or bond markets. At the same time, Willem Klijnstra, asset allocation strategist at Legal & General, says it’s also important to lock in profits when you can.
As a result, he says his multi-asset total return fund’s latest move was to trim its position in gold. However, he’s still positive on the precious metal as a diversifier.
“You don’t just want to hold gold for the sake of it,” Klijnstra says. “It’s the same as equity protection. If you have equity protection and markets fall, at a certain point you need to sell those options – you need to lock it in; if not there’s no point in holding it.”
The direction of travel for the gold price tends – like most predictions do – to be hard to forecast. But there are clear tailwinds through 2019.
Rising interest rates, and altogether loose monetary policy, in the US have prompted what has felt like “seven years of biblical famine for gold and silver investors”, according to Ned Naylor-Leyland, manager of the Merian Gold & Silver fund.
Harari points out that gold tends to be inversely correlated with the US real rate. This has been a headwind as real yields have increased. “Going forward, we don’t think there is much room for real yields to improve, so now is a good opportunity to buy gold as an investment,” he says.
Bull Run For Gold, But Silver Could Outperform
Indeed, that rate rises have come to a “shuddering halt” frees monetary metals from a headlock of hawkish forward guidance, adds Naylor-Leyland. He thinks we are about to embark on another secular bull run in precious metals.
Saxo Bank’s Ole Hansen, coming at things from a more technical angle, sees enough support for the gold price to test $1,360-$1,375, which could lead to additional strength towards $1,480, it claims.
Research house Capital Economics is also bullish on gold for 2019. Its prediction of the S&P 500 ending the year at 2,300 – 16% lower than today – would be a clear positive. Its analysts see gold ending 2019 at $1,350 – around a six-year high.
But estimates for the gold price through 2020 is more cautious. “We expect the gold price rally to start to face headwinds in 2020,” says analysts. “Safe haven demand is likely to fade as China’s economy stabilises and the Fed starts to loosen policy, prompting a revival in equity markets.
“This will more than offset any positive impact from lower interest rates and a weaker US dollar.”
If gold’s performance starts to tick up, so, too, should silver’s. The gold-silver ratio, which measures the value of gold in ounces of silver, currently sits at 83 – a level not seen since the mid-1990s.
“A friendly investment environment for precious metals should see silver, despite its link to industrial metals, regain some of its lost ground against gold,” says Hensen. He thinks the gold-silver ratio could trend towards its five-year average of 74 – a 10% outperformance of silver versus gold.
Capital Ecomomics agrees that silver will outperform gold in 2019, leading to a lower gold-silver ratio. It will also benefit from falling equity markets and declining bond yields. “Furthermore, most silver production comes from polymetallic mines and, given the slump in the prices of many base metals, we think supply growth will slow.”