Danny Dolan CEO of China Post Global (UK) Limited and director of Market Access, has suggested that gold represents more than just a hedge against uncertainty in the wake of the Brexit referendum and ongoing contradictory macroeconomic data as to the effect on both UK and broader European assets.
As an asset manager delivering access to financial products from the rest of the world to investors based in China, and in turn finding investments in the People’s Republic of China on behalf of international investors, China Post Global deals in mutual funds, strategies and risk premia across asset classes – including commodities.
InvestmentEurope started by asking Dolan about the role of gold, considering Ucits requirements, amid the Brexit vote fallout.
“The Brexit vote brought uncertainty to European investors, not just in the UK but across the continent, and increased demand for gold and gold-related products,” Dolan said.
“Investors definitely turn to gold in times of uncertainty. Gold has historically been considered a ‘safe haven’ asset as it tends to hold its value through periods of economic turbulence.
“Physical gold and gold-backed securities can’t be offered in a Ucits format, and ETNs and ETCs don’t have the same attributes as Ucits ETFs in terms of investor protection, risk monitoring and transparency. This can present a real problem for investors.
“The solution for investors seeking Ucits compliant access to gold is a gold mining Ucits ETF.
“Gold mining stocks and the gold price are highly correlated, particularly stocks of gold mining companies that don’t hedge their production.
“Companies included in the NYSE Arca Gold BUGS index don’t hedge production beyond eighteen months, which means they offer great exposure to spot prices of gold.”
What about the FX implications given the volatility seen since the Brexit vote, given the pricing of gold in dollars versus movements in both sterling and euro?
“Volatility recently seen in currency markets is another aspect of uncertainty – investors are concerned about the stability and growth prospects of the UK, European and global economies. Gold is a store of value and if these fears materialise it offers investors a way to protect their wealth.”
“There is an inverse relationship between the price of gold and the strength of the US dollar, meaning when the US dollar depreciates gold prices tend to rise.
“In both cases uncertainty, volatility, macroeconomic risks and geopolitical risks all lead to higher demand for gold and higher gold prices.
“A key parameter when analysing currency markets and gold is interest rates. The current low interest rate environment supports demand for gold. When interest rates rise, investors are more attracted to bonds and deposits as gold produces no income. At the moment interest rates are highly unlikely to rise, meaning the opportunity cost of investing in gold remains very low.”
Spot price of gold denominated in euros – 1Yr change
What gold buying trends are you seening across Europe, given historical differences between markets in the extent to which investors see it as part of their core holdings?
“Gold has a place as a core holding in investor portfolios. Particularly now that uncertainty is heightened and equities and fixed income are unattractive to some investors,” Dolan said.
“One of the reasons why European investors haven’t always held physical gold in their portfolios is that it cannot be offered in a Ucits format – Ucits is the gold standard format for both institutional and retail investors in Europe. Gold mining stocks are an attractive alternative to physical gold – a gold mining index can be offered as a Ucits ETF.
“This is an attractive alternative for European investors, as investing in physical gold is not as common in the rest of Europe as it is in Switzerland. In addition, purchasing Ucits ETF shares is simple and straight forward for retail and institutional investors alike.”
Given ongoing uncertainty over passporting, what is your view on what Brexit might mean for passporting of gold related collective investments?
“The harmonised pan-European funds market that Ucits regulations shaped has benefited European investors tremendously,” Dolan said.
“We expect that post-Brexit every effort will be made to support fund investors and that European funds will continue to be passported freely across all the European countries where this is currently the case.”
“To facilitate this, we would expect that UK funds intended for pan-European distribution will continue to adhere to the Ucits framework post-Brexit. We would also expect that the UK will continue to permit distribution of EU-domiciled Ucits funds after Brexit.”
Volatility seems to stalk all kinds of markets: what are your expectations around the pricing of gold heading into next year?
“Gold prices are expected to remain high and gold demand to remain strong as uncertainty is likely to be prolonged,” Dolan said.
“Equally, gold mining companies are excellently positioned to generate profits as the price of gold has soared in 2016 and demand is expected to remain strong. Gold mining companies currently benefit from low oil prices. They also benefit from stronger fundamentals – over the last 5 years they have reduced costs, improved production efficiency and strengthened their credit profile. Add to these the current low interest rate environment and heightened global risk, and gold mining companies become an even more attractive investment opportunity.”