Gold continues to glitter brightly as safe investment

In times of monetary uncertainty, the world turns to the only reserve currency it believes holds value, gold. So it is no surprise RAB Capital has set up the RAB Gold Fund. While the timing is advantageous, the group has always believed there is value in gold trades.

The fund aims to maximise risk-adjusted returns with a low correlation with major asset classes. It expects to produce a return of 10% a year net above gold returns in all market conditions. To do this the fund uses a derivative strategy focused on movement in the gold spot price, the gold forward curve and precious metals options markets.

The strategy is deceptively simple. It aims to maximise risk-adjusted returns and preserve wealth, primarily through investment in exchange-traded and over-the-counter (OTC) gold and other commodity instruments. There are no geographical or market limitations and the fund takes no pure equity positions. Derivatives are used for investment and/or hedging purposes with long/short positions.

The portfolio has correlation relationships between gold and other asset classes but this does not tend to persist for any meaningful period. Over the long term, gold has a low correlation with most other asset classes, trading more like a currency but with some commodity characteristics. Therefore it exhibits volatility above that of currency pairs but below industrial metals.

RAB launched the fund because it believes gold has proven its liquidity credentials in equity and bond market crash environments. RAB takes a macro perspective on gold. It believes gold should be seen as a hedge against mounting monetary disorder.

Gold has returned an average annual compounded price gain of 8.65% since 1971. However, gold does not offer investors an intrinsic yield and this has been a major historical stumbling block to potential investors globally, from private individuals to institutional investors and even to central banks.

"We believe central banks have spent a lot of time lending gold out and now they want to take it back. We expect more investors to grab hold of the gold market. The Washington Accord meant central banks only agreed to sell 500 tonnes year. They said they would not sell as much as before and the desire to sell gold is not there," concludes fund manager, Steve Ellis.

RAB sees an opportunity offered by gold lease rates. The strategy began in September promisingly, as some central banks took gold loans back due to credit concerns.

These have begun to accelerate as gold borrowing across the curve continues. RAB thinks central banks have been more circumspect in lending longer-dated gold as well, so this environment has made the path to higher interest rates less crowded by lending interference.

Central bank holdings of gold relative to foreign currency reserves are 10% globally, according to RAB. The region with the lowest proportion is Asia. Both Asia and the Middle East are starting to fight inflation by holding fewer dollars.

Because the International Monetary Fund now recognises gold as currency, many countries are looking to boost gold reserves. Should these countries reinstate their gold holdings to 10%, then some significant levels of physical gold would be required. RAB says the confirmed buyers of gold in 2008 have been China, Russia, Qatar, Kazakhstan, Greece, Serbia and Ukraine.

RAB believes more investors will turn to gold as a number of formerly safe currencies, in particular the US dollar, euro and sterling, come under pressure from rapid money supply growth and rising inflation. n