August 2020


View from the Square


Gold prices closed in on $2,000 at the end of July, marking the highest point for the yellow metal in history. Regular readers will know that gold has been a core element in our portfolios for some time. Since the end of 2018, the backdrop has been very supportive for gold, and events of 2020 have only reinforced our view on the precious metal. This year has been the perfect storm to push gold prices up to new highs and many of the reasons for favouring the asset previously still hold true. In particular, it provides protection against a growth shock and against an inflation spike. It also usually performs well in times of dollar weakness, growth of money supply, persistently low rates and assists with portfolio diversification.

One of the main drivers for gold has been falling real yields – that is, the US Treasury yield minus the rate of inflation. Rising interest rate environments often have a dual negative effect of increasing the opportunity cost of holding gold as well as curbing inflation. So, when the inverse of this happens and real yields fall, gold tends to fare well. And that has indeed been evident this year, as US interest rates have fallen sharply.

Gold is not the only precious metal investors are paying close attention to. Silver has started to perform well in recent months too, now outperforming gold. Silver shares a number of the same characteristics as gold, and can perform well in many similar scenarios. However, silver is more cyclical than gold due to its industrial applications.

Investors wishing to access precious metals can do so through two main routes – physical replication or through shares in precious metal related companies. We aim to give clients the opportunity for exposure to both of these. Investing in precious metal producing companies is widely regarded as a leveraged way of maximising returns – when prices go up, investors expect related companies to fair much better, and vice versa. Cost of production is ever changing, but most large companies are sustainable above $1,000 gold. As prices move significantly higher, margins can improve dramatically. During times of severe market stress, it is possible that gold companies and the underlying commodity can lose their correlation due to company specific matters and investor concerns over equities generally. We saw this at the peak of the crisis in March this year. The rational reasons for owning gold are becoming ever more apparent to investors. We do not believe that prices are yet at extreme levels nor are investors exhibiting the sort of euphoric signs that often signal a topping point for an asset. We continue, therefore, to see gold as a core element in portfolios.

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.



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