Investors seek gold and cash as safe havens

Investors are hoarding gold and cash as a perfect storm brews in global equities and credit markets, it is claimed.

Volatile equity markets coupled with the growing risk of sovereign bond default are sparking a rush to defensive assets, fund managers and investment strategists said, with little sign of sanctuary seen in any major global economy.

In an environment where people are ‘simply looking for the least ugly investment’, gold offers a way to preserve purchasing power in the face of market stress and high inflation, said Neil Dwane, chief investment officer at RCM, a unit of Allianz Global Investors.

‘It feels like Europe is firmly in the line of fire but it could quite easily be usurped by worries over the US,’ he said, flagging doubts about the optimism underpinning Asian investment as a hedge on Western woe.

Data published by EPFR Global, which tracks flows in and out of funds running $15 trillion of assets, showed enthusiasm for gold helped drive the biggest inflows into commodities funds for 14 weeks in the week to July 15, when all other 17 major equity and sector fund groups saw outflows.

For those who can't afford gold as prices soar to record new heights, cash is another option for investors unwilling to ride out equity markets or unable to achieve returns from high-quality debt.
Money market funds tracked by EPFR Global pulled in $9.72 billion last week, three times the volume of cash headed for equities or bond funds.

Roger Gray, chief investment officer at the Universities Superannuation Scheme, Britain's second largest pension fund,  said his £31 billion pound fund was now ‘neutrally to slightly cautiously positioned’ having shifted money from equity and fixed income to cash, with the size of the USS's cash re-allocation in the low single digits.

‘The truth is that inflation at the moment would make longer dated bond yields pretty unattractive as well. You could buy a UK indexed gilt and you would have inflation protection and still get a small amount of real yield by doing that, but those real yields are as low as they have ever been,’ said Gray.

Henrik Drusebjerg, senior strategist at Scandinavian financial group Nordea, has recommended clients move a further 5% of their portfolios into cash to reach a maximum position of 10%.

Drusebjerg, who advises both retail clients and fund managers at €192 billion fund firm Nordea Asset Management has turned more cautious since the spring and wants to see US economic improvement and signs euro-zone debt woes are being effectively addressed before changing his mind.

It is not just long only investors who are moving away from risky investments. Hedge funds have sharply cut back their bets recently, prime brokers say, with both gross exposure (their total bets on the market), and net exposure (their bets on market direction), lower.

‘At times of uncertainty it is better to de-risk the portfolio and preserve our investors' capital, than to accept inadequate remuneration for the amount of risk one is taking,’ said Pedro de Noronha, managing partner at Noster Capital.

Gold has now reached a new all time high. As such, in times of risk aversion and weak equity markets they can become oversold, offering an attractive buying opportunity to those investors who believe the gold price will trend higher, according to Angelos Damaskos, chief executive officer, Sector Investment Managers and Fund Advisor, Junior Gold Fund.

The supply of gold is relatively small. A report by the Society of Economic Geologists which reviewed 3,730 international deposits drew some important conclusions. The main findings included that the number of deposits and total ounces found have been steadily declining ever since the 1980s. The average grade of gold mined declined from a peak of 10 grams per tonne between 1965 to 1975 to less than one gram per tonne in 2008, and that the cost of discovery has increased from $10/oz in the eighties to over $47 per ounce in 2009.

‘These findings confirm our belief that the supply of new gold is likely to remain constrained well into the future. Continued rise in investment demand will result in the gold price rising to higher levels. Gold mining companies should therefore see growth in cash flow and profitability that should re-rate their share prices,’ explained Damaskos.

‘The companies with efficient, growing operations, strong balance sheets and active exploration programmes should outperform both the sector and the gold price. These are the companies that Junior Gold focuses on, ‘ he added.