The speculative mania for bitcoin in 2017 shows the enduring desire for a currency that is outside the control of governments. The inflation of past decades may have abated, but the regulation of bank accounts is greater than ever. Whether bitcoin fulfils the functions of a currency remains to be seen, but gold has been preserving purchasing power for thousands of years. Moreover, it provides the physical reassurance of ownership that cryptocurrencies cannot.
Yet while the bitcoin price has soared, the gold price has been trading sideways at around $1,300 an ounce, well below the $1,800-plus reached in 2011. Over the longer term, the story is better. For the 40 years until 1971, when the link with the dollar was broken, the gold price was pegged at $35. It then soared to $800 in 1980 and sank below $300 in the late 1990s, before multiplying more than five-fold to its 2011 peak.
It's all about supply and demand
The World Gold Council estimates that 187,000 tonnes of gold has been mined throughout history, two-thirds of it since 1950. Since gold is indestructible, almost all of this is still around though a recent UN report estimated that $22.3bn-worth is discarded every year in 45 million old electrical and electronic devices, with only 20% being recycled. Mine production adds to supply at the rate of about 3,200 tonnes a year, a rate that has doubled since the early 1980s. However, since 1995, new discoveries have been falling, which makes current production unsustainable.
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As the gold price rises, production responds slowly, but investment demand picks up quickly, while jewellery demand tails off and scrappage increases. Over the medium to short term, this makes forecasting the gold price little better than guesswork. Prices can soar, as they did in 1980 and 2011, for no particularly good reason, or stagnate, as they did in 2013-17, when near-zero interest rates should have tempted buyers.
A turnaround for miners
Stagnant prices came as a shock to gold miners, which had increased output rapidly, embarked on increasingly ambitious projects and then failed to control costs. Since then, the industry has shaken up its management, abandoned uneconomic projects, curbed exploration and cut costs, says Evy Hambro, manager of the £1bn BlackRock Gold & General Fund. This leaves gold equities "trading at attractive free-cash-flow multiples with the potential to compound the returns from any rise in the gold price". In the five years to September 30, Hambro's fund lost 30% overall, while the FTSE Gold Mines index lost 45%.
Moreover, like the index it lost money in four of those years, before more than doubling in the fifth. This record of returns has not come from speculative investment; Hambro focuses the portfolio more than half of which is in the top ten holdings on the largest, best-managed and best-financed companies in the industry.
This is no fund for the faint-hearted. But those who fear that indefinite quantitative easing will end badly, yet who have no wish to join the cryptocurrency frenzy, may be tempted. Gold and gold-mining equities tend to perform well when most other investments are performing badly, so locking some of your money away in the BlackRock fund for more turbulent times makes sense. The real pessimists can buy gold sovereigns from the Royal Mint.
Activist watch
Apple has been forced to defend its technology policy for children after two major investors urged it to address "a growing problem of young people getting addicted" to iPhones, says Elizabeth Dilts for Reuters. In a letter delivered to the tech giant this month, activist investor Jana Partners and California teachers' pension fund CalSTRS, which jointly own about $2bn of Apple stock, asked it to study the impact of excessive phone use on mental health.
The letter also asked the company to consider developing software that would give parents more options to limit their children's phone use. CalSTRs and Jana worry that "even" Apple's reputation could be hurt if it does not address concerns about phone addiction, says Dilts.
Short positions "you just have to suffer"
Not all fund managers managed to dump shares in construction group Carillion before its collapse into liquidation, notes Daniel Grote on Citywire. Among those who "clung on to the stock" are the managers of the Law Debenture and Lowland investment trusts. The former held a £5.3m stake, equivalent to around 0.7% of its portfolio at the end of June last year, right before the company issued the first in a string of profit warnings.
"By the end of last year, the damage to the funds had been done, with the scale of the company's problems making it hard to sell the stake," James Henderson, manager of Law Debenture, told Citywire. "When bad news is out like that, you just have to suffer."
Saudi Arabia's sovereign wealth fund is in talks to invest more than $500m in the talent agency that represents actors such as Ben Affleck and Matt Damon, reports Bloomberg. The country's Public Investment Fund could buy between 5% and 10% of Endeavour, the holding company for Hollywood talent agency WME. Endeavour also owns Professional Bull Riders, the Miss Universe organisation and sports and fashion company IMG.
In December 2017, Saudi Arabia ended a ban on public cinemas that was imposed in the 1990s, "yet another step in the kingdom's efforts to diversify its economy away from oil and bolster its entertainment industry".
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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