Time for gold to shine?

During a volatile year for investors, sources of alpha, specifically uncorrelated alpha, have been hard to find and harder still to maintain. The majority of major indices have fallen in value this year, with MSCI World down -6.29%, the Nasdaq down -19.39% and Bloomberg Barclays Global Aggregate down -11.08%. In previous bouts of weakness in bonds and equities, investors have tended to turn to alternative exposure for uncorrelated returns. However, many have exhibited double digit negative returns.

For example, the iShares UK property ETF is down -31.21% and its American counterpart down -15.15%. This has been spurred on by demand side weakness as rate hiking cycles have increased the marginal cost of debt finance and mortgages above tolerable levels. This, coupled with higher input costs for homebuilders and servicing agents has led to weakness in the sector.

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In these above conditions, commodity and commodity proxy exposure may not have seemed the inherent trade to make. A relentless US dollar,  interest rate hiking cycles, and recessionary worries have impacted various commodity sub-sectors sensitive to these inputs.

However price support has come from ongoing geopolitical risk exacerbating existing supply-side inefficiencies, a hangover from acute underinvestment during the pandemic. Persistently high inflation readings have provided further support. This has led to a large dispersion of returns within commodities, requiring discretion and conviction when determining asset allocation. When we look at the performance of our positioning within this asset class, consistent sources of alpha emerge that have added to portfolio level performance this year.

Return figures based on price changes in GBP

As shown in the chart, all four of our main commodity or commodity proxy positions have outperformed the shown equity and bond benchmarks. Our position in US midstream energy companies has returned 43.32%, the enhanced commodity swap is up 26.19%, physical gold 8.34% and the higher-beta equity proxy of gold miners up a modest 0.54%. In comparison to benchmark returns, this represents consistent outperformance, with our exposure to midstream US energy companies outperforming the MSCI world by 49.62% so far this year.

Indeed, we believe that the environment for continued outperformance for certain commodities is in place. This is specifically pertinent to our precious metals allocation. Whilst gold has outperformed certain equity and bond indices, we do not believe the yellow metal has realised its full potential this cycle. A strong dollar and rising global interest rates have capped price appreciation, and flows into alternative supposed safe-havens such as crypto-currency have, until recently, proven more attractive.

As discussed in our Q4 Quarterly Perspectives, we retain a cautious view on equities and see further relative upside to precious metals. With peak inflation, the growing recessionary narrative and softening rhetoric from Jerome Powell and the US Federal reserve, we think gold has room to run over the course of 2023.

The red areas on the chart above show periods where the S&P 500 index is in a consistent uptrend. During these periods, gold underperforms on a relative basis, as shown on the first panel. Conversely, the green boxes represents periods where gold outperforms US equities, consisted with periods of weakness in the S&P 500. Our base case for the S&P 500 is below current levels and as such we remain positive on gold.

As views on peak US interest rates have softened, we have seen a bottoming of the 10-year Bloomberg Inflation Swap real rate index, which moves inversely to future interest rate expectations. Given the historic correlation to gold, a continuation of this narrative should pave the way for further gold appreciation next year.

Compounding this, behind 1967, this is the second largest year for central bank gold buying. With this increased engagement from institutions, ongoing geopolitical turmoil and the rhetoric surrounding hiking cycles, we believe gold continues to play an important role in prudent risk management, and currently there is a strong fundamental case for holding gold in a balanced portfolio.

This last chart shows net quarterly purchases of gold globally by Central banks. Last quarter was the largest purchase in a decade, with 399 tonnes of gold being purchased, over twice the preceding quarter.

Portfolio Manager - Physicals
When not collecting various minerals and mining memorabilia, Jonah can be found managing the physical allocations at Titan Asset Management.

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Paul Hunt

CEO

Paul Hunt is a proven business leader and entrepreneur with over 30 years’ experience and track record of scaling businesses across multiple sectors. Hunt is highly experienced in business turnarounds, strategic planning and creating a positive people culture geared for success.

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David Chandler

Portfolio Assistant

David is responsible for providing operational support to the fund managers. David has passed the CFA UK IMC and graduated in 2018 with a degree in Economics and Business Management from the University of Sheffield.

James Peel, CFA

Portfolio Manager – ESG

James is a Portfolio Manager at Titan Asset Management and is responsible for Titan’s approach to sustainable investing. He previously worked as a researcher at the British Chamber of Commerce in Taipei. James graduated in 2018 from the University of St Andrews, where he studied economics. He is a CFA charter holder and has passed the CFA UK Investment Management Certificate (IMC), the CFA UK Certificate in ESG Investing, and the CFA UK Certificate in Climate and Investing (CCI).

Jonah Levy, CFA

Portfolio Manager – Physicals

When not collecting various minerals and mining memorabilia, Jonah can be found managing the physical allocations at Titan Asset Management. Prior to Titan he worked at Tavistock Wealth for 3 years, having previously gained experience in Holland at an oil brokerage, and in London at an energy trading house. Jonah is a CFA charter holder, having graduated from St. Andrews University with an MA in Management and Economics.

Alex Livingstone, CFA

Head of Trading – FX & ETFs

Alex is responsible for the ETF trading and FX strategy at Titan Asset Management and has executed over £5 billion of trades during his prior 4 years at Tavistock Wealth. Alex also assists in the wider portfolio management of the CIP specialising in technical analysis and risk management. He is a CFA charter holder and holds an BSc in Retailing, Marketing and Management from Loughborough University.

Sekar Indran, CFA

Senior Portfolio Manager – Equities

Sekar is responsible for managing the team’s equity investments. He helped expand the investment proposition over five years at Tavistock Wealth and continues this role at Titan Asset Management. Sekar has prior financial services experience at Barclays and Allianz. He is a CFA charter holder and holds a BSc degree in Industrial Economics from the University of Nottingham.

John Leiper, MSc, CFA, FDP, CFTe

Chief Investment Officer

John Leiper is the Chief Investment Officer of Titan Asset Management and carries direct responsibility for all investments in the Centralised Investment Proposition (CIP) at the firm. John has 15 years’ experience in financial markets having previously worked in a variety of roles at RBS, Morgan Stanley, Credit Suisse and Tavistock Wealth. John Leiper is a CFA and FDP charter holder and a member of the Society of Technical Analysts. He holds a BSc degree in Economics from Warwick University and an MSc degree in Economic History from the London School of Economics.

Matthew Cureton

Co-Founder

Matthew has been an intrinsic part of Haibun (now Titan Alternatives) since its formation. As a Co-Founder, he has focused on developing relationships with clients, providers, and companies seeking funding.

Matthew’s personal involvement with the fund-raising activities at Titan Alternatives starts at the very beginning of each journey.

Incorporating the due diligence process, meeting with the various management teams, and visiting companies on site, to then being involved with the marketing documents, hosting presentations, and facilitating the investments for clients. Matthew also continues to monitor and report on the investment throughout its life, which has included him taking on Non-Executive Directorships or observer roles on various company boards.