Gold Rally is Here to Stay says Lombard Odier

We're in a new gold market, says Lombard Odier - thanks to radical central bank policy, investors are piling in to the perceived safe haven and pushing up the price

Emma Wall 23 May, 2016 | 12:01PM
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Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" My name is Emma Wall and I'm joined today by Joe Foster, Manager of the Lombard Odier World Gold Expertise Fund.

Hello, Joe.

Joe Foster: Hi, Emma.

Wall: This has been a fantastic year for you after a couple of years of underperformance. Year-to-date, the fund is up 85%. What's driven this fantastic rally?

Foster: Well, there is – I think we are in a new gold market actually. Investors are very concerned about financial risk and gold is being used as a safe heaven. Especially, investors are looking at central bank policies. We've seen these radical central bank policies that don't seem to be working and now with negative rates, the Fed not able to increase rates as aggressively as they'd like to, it's creating a lot of concerns in the financial system.

Wall: Of course, there have been a lot of things going on which you would have thought in the past people would have got this safe heaven, things like the Greek crisis a couple of years ago. But gold stayed down, but now you are saying there is a perfect storm finally, it's the sort of final straw that broke the camel's back and people have that flight to safety with gold?

Foster: The difference this time is, I guess, what happens in Greece stays in Greece. It doesn't have global implications. Now, people are worried about the global financial system. The central banks in Europe, in Japan, have negative rates now. And our financial system wasn't designed to run with negative rates. So, people are very concerned.

Wall: Of course, all asset classes have had quite a lot of volatility in the last few years. So, I suppose the next question is, will this rally continue or in another three, four months will we see those gains lost?

Foster: I think we're in a new gold market. And we've seen investment demand in the west like we haven't seen in a number of years. Tremendous flows into the gold bullion ETFs, the COMEX and the futures market, a big shift in sentiment in the futures market. So, yeah, I think these changes are here to stay. I think these radical monetary policies we've seen over the years could end badly and that's what investors are concerned about now.

Wall: And the majority of your fund at the moment I believe is in gold-related stocks, although you can hold up to 10% in gold bullion. What are the slight nuances between investing in sort of real gold versus gold-related equities?

Foster: Well, the gold stocks, of course, they have gold reserves. To me, their reserves are like gold in a vault and they mine those reserves. These companies have leverage to gold. So, as the gold price goes up, their earnings go up at a higher rate. So, they have good leverage to gold and you'll get better performance through the gold equities in a positive market.

Wall: Joe, thank you very much.

Foster: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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.

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Emma Wall  is former Senior International Editor for Morningstar