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Gold miners - another way to hedge your portfolio

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Gold is continuing to hover near its six-year high, buoyed by global economic fears and a widely anticipated rate cut from the US Federal Reserve tomorrow could see it go higher still.

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But with the precious metal having traded at $1,450 an ounce in the past year — its highest level since April 2013 — primarily over ongoing concerns about the US trade war with China, escalating tension between Iran and the west, and even Brexit, gold has now become too expensive an investment for many.

And that’s a problem, because all the factors that make gold attractive mentioned above are not showing any sign of abating any time soon; making the allure of adding some gold to your investment portfolio even greater.

Safe haven

Gold has long been a safe haven for investors wanting some element of core stability - and an element of diversification - in their investment portfolios. Especially during times of turmoil assets like bonds and equities tend to become correlated. Gold, however, usually becomes negatively correlated, making it a good way to diversify your risk.

However, the good news is that you do not have to invest in gold bars to get that element of diversification. There are numerous ways to invest in gold, apart from buying the physical metal. You can invest indirectly through exchange traded funds (ETFs), which track the price of gold or you can buy shares in companies that produce gold or indeed in the funds that do the same.

Where gold mining shares differ from investing directly in solid gold is that as well as the gold price having an effect on value, they are companies - so the potential growth and returns they give investors are dependent on how well run they are and the strength of the management team’s decisions.

To cap it all, the gold mining sector is large, with over 300 publicly-traded gold mining companies, whose market values range from teeny micro-caps to goliaths worth tens of billions of dollars. Knowing which of these to invest in can be tricky and that’s where an experienced fund manager comes in.

The perceived complexity of picking and choosing gold mining stocks may be too much for some to contemplate, but fund managers like George Cheveley, who runs Investec Global Gold, have a solid record of showing how gold miners can come into their own as a complementary investment against even the falling price of gold.

As he explained to me when I spoke to him recently, for our Select 50 fund focus video series, investing in a fund like his should give you comfort that you’re investing in good quality gold companies that will not only give you leverage when the gold price rises, but also should provide some defence when the price falls.

Cheveley has built up a solid record, choosing gold mining companies exclusively for his fund. Investing purely in miners, he also has scope to invest in silver, palladium and platinum; the latter of which he has in the portfolio at the moment.

Ticking the ESG boxes

Gold is a complex and emotive investment. The price of gold is based not solely on supply and demand (which of course plays a large part) but on good old investor sentiment; the feeling investors have about the yellow metal drives prices.

And investing in gold mining companies is not without its risks. The rising cost of exploration has made the replacement of mined output expensive, and ore grades are falling, meaning that more rock has to be blasted for the same gold content.

In addition, gold miners are subject to the same cost pressures on labour, equipment and fuel costs as the rest of the mining sector, and it is easy for management to fritter away the advantages of higher prices on over-ambitious expansion.

Mark Twain once famously dismissed the gold mining industry in one fell swoop; describing goldmines as “a hole in the ground with a liar at the top”.

And there have been plenty of examples of such holes in the ground and their Twain-labelled liars on top. But the industry has cleaned up its act and today’s quoted companies are accountable, transparent and - most importantly - efficiently and competitively run.

George Cheveley says he pays close attention to companies’ social, environmental and governance record.   

“We want to make sure we’re investing in the right sort of companies. History shows that those companies run the most properly and that do things right tend to outperform”

That means he says analysing not just cashflow, balance sheets and the numbers, but also looking closely at how these companies conduct themselves in the countries they’re operating in is crucial.

Five year performance

(%)
As at 30 June
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Gold -12.2 15.1 -9.1 1.8 14.2

Past performance is not a reliable indicator of future returns

Source: Refinitiv from 30.6.14 to 30.6.19. Price index in US dollars.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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