Thursday, 12 September 2013

PNL Personal Assets Trust - some guidance on why I own gold

There were two views on the gold price dropping down today (PHGP down 2.5%):

- on the one hand the gold bugs point to a 'paper-based' assault on the gold price last night:

- on the other hand the gold doubters point to the increasing likelihood of the Federal Reserve tapering off its quantitative easing. In this BullionVault piece analysts suspect more price falls with little chance of this being offset by Indian Jewellery buying or inflation picking up

Sebastian Lyon at Personal Assets Trust (PNL) said in an interim management statement (August 16):

Economic growth remains fragile and the corporate earnings cycle appears to have peaked some time ago. The move up in stock markets, over the past year, has been the result of a reduction in risk aversion rather than any meaningful rise in earnings, with a consequent increase in valuations. Buoyed by greater confidence in the abilities of central bankers, momentum has fed on itself. While good economic news is viewed positively, bad news is also good news because it is likely to lead to renewed market intervention. This paradox cannot last forever.

The US stock market, on a cyclically adjusted price earnings multiple of 24x, is 50% overvalued compared to its long term average. Deteriorating fundamentals coinciding with high markets at record profit margins are an unattractive and risky combination. Rushing into rising stock markets, four years into a rally, is driven by the need for short term returns and is not a path we will take. On the basis that profit margins and stock valuations revert to the mean, now does not seem to be an opportune time to be adding to equity allocations.

Short-term missed opportunities are the price we pay for dependable and sustainable wealth protection and growth over the long-term. Complacency is an enemy of successful investing and so is panic. Risks are now rising, notwithstanding the benefits of the printing press. We wait patiently on the side-lines for the market to offer us better value.

The portfolio's inflation protection in gold and index linked bonds has hurt recent performance. These will have crucial roles to play against the force that rarely preannounces itself. While it is painful to be punished for prudence, we are confident that short term falls in the price of these assets will not lead to falls in their long term value. The risk of higher inflation over the medium to long term remains and this makes the protection provided by these assets worth having.

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