Gold hunt in Germany

Historically, gold has been the safe haven of choice for investors battling stock market volatility, which makes it all the more surprising that the Bullion Vault price of gold dropped from more than €43,000 per kilo to just over €31,000 per kilo by the end of 2015.

But with stock market volatility on the rise at the beginning of 2016, gold finally behaved according to the rule book: Bullion Vault prices per kilo rose to just over €36,000 as of May 2016. What, then, are the key drivers behind the recent gold rush and how has it played out among German investors?

MACRO TRENDS
The recent investor interest towards gold is characterised by two key global macro trends. First, the West turned from being a net seller to being a net buyer. “Not since the days of Marco Polo and the Silk Road has there been such an epic movement of bullion from West to East in exchange for fripperies,” argues Ross Norman, CEO of London-based gold dealer Sharps Pixley.

A key driver of that trend was the central banks. Germany alone is now estimated to hold 3,381 metric tonnes of gold, making it the second biggest sovereign gold owner
globally, according to the latest data provided by the World Gold Council.

Demand for gold appears to be driven by a bearish outlook on the world economy, combined with the effects of monetary policy, argues Matthias Hoppe, senior vice president and portfolio manager covering European Multi Asset Portfolios at Franklin Templeton. “Given the current expansionary policy, short term real yields in fixed income are low or even negative, in this context, the opportunity costs of holding gold are low.

Moreover, market participants currently have arelatively high level of risk aversion. This explains why investments in gold are attractive to many,” he argues.
“A key challenge with gold is that it remains hard to value,” he stresses.

SPECULATIVE ELEMENT
Katharina Ehrhardt, portfolio manager Multi-Asset and fund analyst at W&W Asset Management warns of the speculative element: “Following an extremely poor
development of the precious metal sector and weak sentiment as a result of that, the mood has turned at the beginning of this year. “Sharp price increases over a short timespan have attracted further investor interest. We recognise a clear speculative element in current price gains but nevertheless expect this trend to last for quite a while.”

German asset manager Flossbach von Storch prominently cashed in on the trend. At the beginning of May, co-founder Bert Flossbach announced that nearly 14% of
his Multiple Opportunities Fund was now held in precious metals, amounting to a €1.5bn investment. Yet for Hoppe, investments in gold should be seen as a tactical diversification, rather than a strategic gamble.

“Within our Franklin Diversified Balanced Fund, we currently hold up to 5% in gold. However, we believe that the relative contribution to the risk profile should be the key factor to consider, gold should only be considered if it contributes to diversifying the portfolio. We don’t believe that gold offers particularly strong inflation protection. Other metals, such as copper, have performed far better. But the fact of the matter is that gold benefits from fears of financial turmoil, like a stock market crash,” he argues.

EXCHANGE TRADED VIEWS
A second key trend of the recent gold rush is that investors approach gold investments increasingly through exchange traded products – ETFs and ETCs. While investor demand for physical gold has decreased by 2% yoy, demand for gold ETF’s and similar products has surged by more than 300% yoy, according to the World Cold Council.

The fact that ETF’s have been the key drivers of this growth could signify heightened risks of volatility, argues Ross Norman, CEO of Sharps Pixley: “… it could be argued that ETFs are paper or physical – this is irrelevant – what matters is how they behave and as we saw since 2011 these players can operate with the same short termism as speculators and rapidly reverse their positions.In short neither can be entirely trusted,” he warns.

A key reason for the growing popularity of exchange traded products is the fact that Ucits compliant funds are not able to conduct physical requirements in gold highlights Hoppe. W&W Asset Management has approached the commodities trend from multiple angles. “The W&W Sachinvest fund manages a real value strategy with long term commitment to investments in gold, silver and platinum, which currently amounts to 25%. As part of a portfolio centred on real assets, precious metals continue to constitute a core investment,” explains Ehrhardt.

“As of December 2015, we also increased commodities exposure for our wealth management strategies for the first time by investing in a commodity fund, which had a clear overweight in precious metals. The overall share of commodities within the W&W Vermögensverwaltende Strategie Fonds was at 0% for years but now increased to more than 6%” she stresses. We buy gold, silver and platinum through physically replicated ETC’s using multiple providers.”

INDIRECT EXPOSURE
The fund research team of W&W Asset Management also seeks indirect exposure by investing in mining shares. “We do hold a small position in mining stocks within our global equity fund of fund, which has made us very happy this year. Following many hard years for mining stocks, resulting in pressures to cut costs and improve efficiency, we now believe that the rising gold price has generated a leverage effect and will continue to have a supportive effect on mining stocks,” Ehrhardt predicts.

For Ehrhardt, key risks of gold investments can be found in a changing macro environment: “Following a more than 100% increase of some gold mining funds throughout the beginning of this year, there is definitely a high shortterm probability of markets turning. “For direct gold investments, we also see a risk of profit taking, as the macroeconomic environment shifts in favour of the US dollar and the next Fed rate hikes being discussed. It is likely that those voices pointing to a negative correlation between US rate hikes, an appreciating US dollar and the gold price will become louder,” she warns.

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