Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I am joined today by Ned from Old Mutual to talk about gold and silver.
Hi Ned.
Ned Naylor-Leyland: Good morning Emma.
Wall: So, the first question is why is the gold price not higher considering the significant political turmoil we faced over the last year.
Naylor-Leyland: Well, my first answer to that would be to point out to you that gold in sterling is actually doing very well particularly after what happened with Brexit a year ago. Obviously, sterling weakened and so the sterling gold price in fact is near its all-time highs. Investors always look at gold in dollars, but unless they are actually situated in the U.S. that’s probably not the right thing to do. So, gold is doing okay, but it is also important to say that gold doesn’t move based on geopolitics. So, you might think a bomb would go off and gold would go up.
But actually, gold moves on the basis of real interest rates, or real yield so that’s the relationship between inflation and interest rates. If you are losing money holding cash, gold will go up or if you think you are gaining purchasing power holding cash, gold will go down and that’s really what moves the price.
Wall: And so then interest rate rises as we saw in the U.K. last week and as we are expecting to see in the U.S. in December. That sort of thing should have an effect on the gold price.
Naylor-Leyland: It absolutely will always have effects on the gold price, but its again always about the relationship. So, if we think inflation is going faster than expected and we think interest rates are going slower than expected, than gold will absolutely go up and vice versa. So yes, it’s the relationship between both those things that’s what drives gold up and drives gold down. But I do think gold should be in all portfolios anyway because it has a very obvious decorrelating effect on portfolios which is something people are looking for.
Wall: And looking at U.S. dollar terms although we are situated in London the gold price is around $1,200 and something, it was $1,800 and something in 2011, 2012, 2013. Can you as an investor expect to see those kinds of prices again?
Naylor-Leyland: Well in my view undoubtedly yes. And even more so with silver. In fact, if you look at gold and silver on an inflation adjusted basis over a very long timeframe you are going to find there is nothing else you can buy which is trading at a fraction of where they were 30, 40 years ago on an inflation adjusted basis. Really, these are absolutely countercyclical hedge assets. Now you may not have needed to own them for 40 or 50 years. But I'll tell you that cyclically this is a moment where you do need portfolio insurance, and so you are just getting it at a much cheaper price than you might otherwise have had three or four years ago.
Wall: And of course, there are several ways to invest in gold. One is to invest in the commodity itself and other one is to invest in the equities that are exposed to that. Where do you see as a fund manager the opportunities in gold and silver at the moment?
Naylor-Leyland: So, you want to buy the gold and silver mining equities if momentum is moving towards the metal. So, if money is coming in they are going to provide a geared effect. So, a fund like the one that I manage will deliver you somewhere in the order of 2 to 4 times the underlying gold price effect. What that means in my view is you can hold a smaller allocation at portfolio level and deliver a much more meaningful outcome, whereas if you hold physical alone really you probably going to end up needing quite a large allocation to deliver the sort of attribution characteristics that you are really looking for.
So, I think the opportunity is in the mining stocks although we have around 20% of our portfolio in physical as well. So, it’s a combination of the two things.
Wall: Ned thank you very much.
Naylor-Leyland: It's my pleasure.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
