Why I Own Gold Right Now, by Investor of $2.8 Billion

Alec Cutler, who runs the $2.8 billion Orbis Global Balanced fund, has revealed the reasons why he thinks now is a good time to be invested in gold.

Cutler has around 5 per cent of the fund deployed in gold.
He told What Investment, ‘if you look at the different possible economic scenarios we are faced with now. The first is that we are all going to become like Japan, with no growth, and very low bond yields. Well, the number one reason not to own gold is that it pays no income, but in this scenario, bond yields are very low or negative so nothing pays an income, and that’s good for gold.’

Cutler continued, ‘The second scenario people look at right now is that we end up like in the 1970s, with stagflation, very high inflation and very little growth. Well in times of very high inflation, gold does well as a store of value. It did well the last time we had this scenario.’

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He continued, ‘And maybe the risk that people are under-estimating, the geo-political risk, with the various people that are in power in the US and in Russia, and the people that could get elected in Europe this year, there is a lot of risk out there.’
The veteran investor continued, ‘and in that situation, gold could do very well, it is the perfect asset for that environment.’
The fund manager added, ‘the current situation that we have is kind of goldilocks, with the economy neither too hot nor too cold, not ideal for gold, but when you look at the difference scenarios, two of the three are good for gold.’
Cutler next turned his thoughts to what he called the ‘fundamentals’ of the gold market.
He commented that, ‘the last time we had a low gold price something changed in the market, at the company level. The companies are no longer run by gold bugs, they are run by private equity guys and investment banks, and those guys care about things like profits and dividends. So when the gold price went from $1000 to $1200, in the past the gold bugs running these companies would have been about opening a new mine. The guys running the companies now said, well let’s pay down debt, and if there is cash left after that, then they pay a dividend, so that has lead to a change, in terms of gold supply.’
Cutler has relatively little exposure to bonds, and nothing in government bonds.
He commented, ‘We think the yields offered by government bonds mean that they are a risky asset right now.’
The Orbis Global Balanced Fund has returned 46 per cent over the past five years, compared to 24 per cent for the average fund in the IA Mixed Investment 40-85 per cent sector in the same time period.

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