Will gold find a silver lining in 2019?

After a tough 2018 for gold investors, Merian Gold & Silver Manager Ned Taylor-Leyland explains why holders of gold and silver, and their underlying mining shares, may be better supported in 2019.

2018 has been a relatively tough year for gold investors. The yellow metal often moves in the opposite direction to the US dollar, and over the past year a stronger dollar (a result of higher interest rates in the US) has coincided with some gold weakness. But as we find out in an interview with Ned Taylor-Leyland, Manager of the Merian Gold & Silver Fund, the advent of heightened volatility could prove a real bonus for holders of gold, silver and their underlying mining equities.

Please remember that the value of your clients’ investments can go down as well as up and may be worth less than was paid in.

The views expressed in this article are those of the Merian Global Investors and not Standard Life Aberdeen. Standard Life Aberdeen accepts no responsibility for advice that may be formulated on the basis of this information.

The past year has been a tough one for gold investors – what cause for optimism is there in 2019?

The US trade wars that dominated headlines in 2018 are a symptom of an international monetary system in desperate need of reform. We, at Merian Global Investors, firmly believe that ‘de-dollarisation’ is upon us; no longer is the “exorbitant privilege” of the US dollar sitting at the heart of the financial system deemed acceptable.

Importantly, from 1 January 2019, under Basel III – the international regulatory framework for banks – monetary gold will qualify as a Tier 1 asset. We have long argued the case for gold and its role as apolitical money; the case is getting stronger. Turkey recently demanded IMF loans be repaid in gold rather than dollars, while high profile German and EU figures have been pushing for structural monetary evolution. Gold is at the very centre of any such plans.

What do you view as the main investment challenges of 2019?

Many investors are worried about the likelihood of a major and correlated trend reversal; all roads have led to US equities for so long that the possibility of a painful shock looks high. The bond market continues to price another three or four hikes in the US in 2019. However, leading indicators of credit markets indicate that the rate hikes that have already happened are now creating significant problems.

But if there is a need to change tack (due to worsening data, geopolitics or an equity market sell-off) then gold is likely to jump higher as forward-looking real rates fall.

How do you build a genuinely balanced portfolio?

Physical gold on its own is, in effect, a currency position. And like any other currency position, it can only have a nominal overall effect on a portfolio. We try to blend exposure to physical gold with high-quality gold and silver miners predominantly based in the Americas and Australia. This mixture of a high weighting to physical gold and a strong allocation to silver assets can help deliver a differentiated and practical balance for investors.

The silver price is at historic lows relative to gold and could deliver powerful additional gearing to the portfolio blend as and when bull market conditions re-establish themselves. A silver lining indeed.

Which gold-related opportunity are you most excited about?

Beyond the possibly seismic trend of ‘de-dollarisation’, I’m keeping a close eye on the next potential primary exploration and development gold centres.

These gold camps have traditionally been clustered in specific regions – South Africa is a prime example. But despite what some geologists say, there are likely to be more out there. Right now, there are very interesting developments going on in the Pilbara region in Western Australia, Timmins in north-eastern Ontario, Canada, and the Central Lapland Greenstone Belt in Finland. One of these could prove key in the future.

The views expressed in this article are those of the Merian Global Investors author and not Standard Life Aberdeen. Standard Life Aberdeen accepts no responsibility for advice that may be formulated on the basis of this information.

Please remember that the value of your client’s investment can go down as well as up and may be worth less than you paid in.

 

Ned Taylor-Leyland

Ned Taylor-Leyland, Manager at Merian Gold & Silver

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