Gold funds lead the way as investors look for safety - how best to invest in the metal now

London (May 26)  Specialist gold funds have clocked up gains of more than 20pc since the start of the year, putting them among the best performers of the 3,500 or so collective investments that make up the funds universe.

But one sector has outstripped even pure gold – the gold miners.

Taking a look at the top-performing funds so far this year, funds that invest in gold miners dominate.

Investec Global Gold, MFM Junior Gold, Ruffer Gold and Blackrock Gold & General are all among the top performers, while WAY Charteris Gold & Precious Metal and the Smith & Williamson Global Gold & Resources fund have also delivered stand-out performance.

Should you go for gold?

Gold has staged a rapid turnaround. At the end of April year the gold price moved above the $1,260 an ounce level, taking it 20pc above its December 2015 low of $1,050. It is currently around the $1,245 mark.

As a result, investments into gold exchange-traded funds (ETFs) in Europe have boomed, making it the most popular sector among passive investors, according to data from Morningstar Direct.

“Gold tends to be a good ‘fear’ indicator, so when investors are nervous, they feel they can hide their money in gold”

Philippa Gee

Two physical gold exchange traded commodities (ETCs) - Source Physical Gold ETC and ETF Securities Gold Bullion ETC - are in the top three ETFs.

Alistair Hewitt, from the World Gold Council, said this upsurge in precious metal ETFs was the “dominant” driver of price rises during the first three months of this year.

But not all areas of gold investing have the Midas touch. Shares in gold miners fell further than the price of physical gold last year, and have failed to capture the rises so far this year.

Following a decade long bull-run, the height of which was a peak at $1,900 in August 2011, the price of physical gold fell 21pc between the start of 2011 and the end of last year. The FTSE Gold Mines index lost 75pc over the same period.

This is down to various factors, including the rising cost of getting gold out of the ground. ETFs, which track the price of gold directly, have been seen by investors as a better bet.

This could change, however, according to Angelos Damaskos, joint co-founder and principal adviser to Junior Gold, once the benefit of price rises filter down to company profits.

“For investors who believe that the gold price will continue to rise, the increased operational leverage from gold shares is very attractive. Take a gold mining company producing at a cost of $600/oz. If the gold price is $1,200/oz and it rose by 25pc to $1,500/oz, this would increase the mining company’s profit by $300/oz – a rise of 50pc.”

The key for the mining companies is to keep their costs of production lower than the price of gold in order to make a profit. If they manage this over the long term, profits should rise and ultimately benefit the share price.

But many gold mining companies, while benefiting in general from the rising gold price over the past decade, let costs spiral out of control, leading to lower share prices and poor performance from gold funds. 

Can price rises continue?

It is still early days for a prolonged recovery. Only at the start of 2016, experts were divided as to whether to buy gold. The strong US dollar and a continued slowdown in China meant many thought the gold price could stay depressed for some time.

But the fundamentals are certainly in place for gold to perform well, as it traditionally does in times of turmoil. There is continued demand from sovereign nations, uncertainty surrounding much of the global economy, geopolitical risks and, closer to home, the EU referendum throwing uncertainty into the investment mix.

All of which should increase the lustre of gold.

James Steel, chief precious metals analyst at HSBC, sees gold as a long-term insurance policy.  In his latest briefing note he said the EU referendum could push the rally even further.

“Another bullish driver of gold may be the potential for hedging ahead of the UK’s referendum on EU membership”, he said. “We continue to see the potential for gold to reach $1,300/oz this year. As well as a weaker dollar, we see global risks and a modest recovery in oil prices as gold-bullish.”

There are many who believe that gold, in its physical form, should be a fundamental part of any portfolio. And research from the industry appears to bear this out.

According to BullionVault, a gold investing service, a 10pc holding would have roughly halved portfolio losses in the worst year for equity markets of the past 40. The price paid would have been the reduction, by almost two percentage points, in the average annual growth over a five-year period.