Nutmeg portfolios: why we’re no longer holding gold

Shaun Port


2 min read

Central banks, and specifically the US Federal Reserve, are likely to start unwinding emergency measures put in place after the 2008 financial crisis. We believe these actions will make gold less attractive – so we’ve sold all our holdings.

Photo of sparkler sparkling with light flares

Professional investors often talk about the ‘hedges’ in their portfolios. An investment hedge is not of the green landscaped variety, but rather something held in portfolios for times when things go wrong – a bit like insurance.  And, like insurance, paying a ‘premium’ in good times can often seem like a waste of money.

For some time now, we’ve held a classic hedge in our portfolios: gold. We’ve held gold via owning an exchange-traded commodity (ETC) fund, like an ETF, which holds physical gold bars numbered and kept in a London vault.

Investors commonly hold gold for a myriad of reasons, often because – in their view – disaster is about to strike the financial system. Other reasons are that gold is an alternative currency and a store of value if inflation rises sharply.

Here at Nutmeg, we’ve held gold for its usefulness as a diversifier of risk in our portfolios but particularly to benefit from an expected rise in global (US) inflation.

Not always a ‘gold medal’ performance

As shown in the chart below, gold peaked in value in 2011. Since then, performance has somewhat flat lined.

Chart showing price of fold 2008-2017

Over the past three years, gold has behaved a lot like bonds, even though gold offers a very minimal yield – which is not enough to cover costs of securely storing the metal. Specifically, the gold price has moved closely with the ‘real’ yield, shown in the chart below.

The real yield is the yield on a government bond less the expected rate of inflation. We can measure this easily from an inflation-linked government bond, which pays a yield – effectively the real yield – plus a regular coupon based on the prevailing rate of inflation.

Chart showing Gold vs US 10-year real yield

Gold may be losing its glitter

In early July, we sold all our holdings in gold.

Over recent weeks, central banks around the world have signalled that they’ll soon begin the process of unwinding the exceptional measures (quantitative easing) put in place after the financial crisis to support growth and prevent deflation.

Most significantly, the US Federal Reserve is likely to start unwinding quantitative easing by slowly reducing the amount of bonds it owns as it continues to raise interest rates. In such an environment, we believe that gold will become much less attractive to investors.

Instead, we prefer to own US inflation-linked bonds (TIPS) which act as a useful diversifier of risk in our portfolios but also have an explicit link to inflation, as well as other assets like emerging market equities which benefit from higher global prices.

As always, we manage Nutmeg client portfolios to ensure a good balance between potential returns and reasonable amounts of risk. So, if the view on gold changes in the near or not-so-near future, we’ll revisit our position on it.

Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.

 

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Shaun Port

Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.


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