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Is Gold Undervalued?

The gold price has risen year to date - but one multi-manager is saying the real asset looks cheap and has invested on a value basis

Karen Kwok 14 June, 2017 | 4:29PM

The gold price has rallied this year – after hitting a six-year low in December 2016. The gold price is now at $1,266 per ounce, up from $1,062 on December 1. Last time the price of gold was that low was in October 2009 when it dropped to $1,043.

The uptick in the value of the yellow metal suggests that there is more demand in the market. Gold is traditionally held as an insurance against losses elsewhere; when economic outlooks look clouded, or there is great volatility in equity markets. The finger this time around could be pointed at the political uncertainty across developed markets; Trump, Brexit and European elections.

But for Stan Verhoeven, co-lead portfolio manager, Multi Asset Factor Opportunities at NN Investment Partners, his preference for gold is for a different reason: value.

In May, Verhoeve upped his gold allocation to more than 10% from having previously shorted the precious metal the month earlier. Gold subsequently became the highest positioning of all commodities in the fund.

“I believe that the change of our position on gold to overweight in one month is mostly because of the value,” said Verhoeven.

Verhoeven is a factor driven investor. Rather than letting macro events dictate his investment philosophy he invests based on five factors; value, carry, momentum, flow and volatility. Within the value factor he seeks to benefit from incorrect valuations, buying undervalued assets and selling overvalued assets.

Verhoeven explained that from a technical point of view, the value factor has a slightly higher impact on commodities allocations than rest of the asset classes.

“On average commodity value is most negatively correlated with all other asset class factor combinations. This leads to higher notional allocations of the value factor with commodities as we have an equal risk contribution approach to portfolio construction. Higher notional allocation of the value factor with commodities is required in order to balance the risk of the value factor with all other factors taking into account correlation,” said Verhoeven.

As the price of gold is determined by the balance of supply and demand in the market, he argues that the value of gold cannot be measured under fair value metrics like equities and currencies. However, Verhoeven continued that you can use some of the same principles to determine whether each resource is fairly priced.

“We look at the average 50 day returns of the last five years, comparing them to the current levels.  This idea is taken from the five-year universal strategy we apply when we look at equity valuations. If you apply the same strategy across assets classes, it works,” said Verhoeven.

Gold Sentiment Hit New Year High in May

Gold sentiment amongst private investors jumped to a new 2017 high in May, rising at the fastest pace in over two years, according to BullionVault’s Gold Investors Index. The index showed that in May gold sentiment reached 55.3 from April’s level of 52.1.

The index would read 50 if the number of net gold buyers across the month equalled the number of net sellers perfectly.

Following the outcome of the General Election last week, the fall in sterling is driving gold price higher in the UK, said Adrian Ash, director of research at metals platform BullionVault.

“Gold tends to do well when other assets do badly. The clouded outlook for shares, Gilts and particularly the Pound make gold a must-have form of investment insurance as the reality of this Hung Parliament bites,” said Ash.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk