Gold is having a good run. It ended 2017 with a spring in its step and has carried that form into 2018, notching up eight consecutive trading days heading in the right direction, its longest winning streak since 2011.
It is supposed to be the ultimate safe haven, yet in recent years gold has been driven instead by expectations over the value of the dollar, rather than the mere threat of nuclear war, regional conflagrations in the Middle East or shock election results. There are two questions for investors. Is it worth having exposure to gold? And, if it is, what is the best way of doing so?
Gold could play a worthwhile role in a balanced portfolio, particularly for the British investor. Other things being equal, it will outperform in times of strife. And there seems to be consensus that the dollar will be under pressure this year, just as it was last year.
With President Trump’s tax cuts in the offing, this may seem counterintuitive, especially given the wall of overseas earnings by US companies that is ready to be repatriated. But that flow of income back to the US is already priced in and, in any case, the funds were largely in assets that were dollar-denominated.
There is a reasonable prospect of that translating into higher gold prices. This could be particularly useful as sterling’s fate looks set to be determined by the progress in Brexit talks. Ordinarily, investors would be cushioned from the weaker pound because of the translation effect on a company’s overseas earnings. This is why the FTSE 100 recovered so spetacularly after its Brexit sell-off in June 2016. A weaker dollar would dampen that effect, so gold could be the silver bullet.
But how to buy it? Buy gold coins? Bullion? Or perhaps an exchange-traded fund that provides the exposure to the price without any of the inconvenience of paying to stash it somewhere?
Tempus has long maintained that it is far more sensible to buy into gold by looking for a sensible goldminer. The reason is simple: inert metals do not pay dividends. Indeed, if an underlying commodity’s contract prices rise the further you get into the future — as is the case with gold at present — the spot price has to run to stand still.
The FTSE 100 has two precious metals miners. Randgold Resources, under the stewardship of Mark Bristow, has developed an enviable reputation for operating profitably in sub-saharan Africa without growing recklessly. It also has a well-signalled intention to hand back surplus cash to shareholders. The downsides are its price tag and political risk, particularly at its Kibali mine in the northeast of the Democratic Republic of Congo. The possibility of regime change in Kinshasa may not augur well, nor does the growing friction over the government’s proposed mining charter.
The other big precious metals miner is Fresnillo. Historically it was focused on silver, with gold as a bonus byproduct, but recent acquisitions have given it a more even split. It operates in Mexico and pays out between a third and half of its post-tax profits each year in dividends.
Our pick outside the FTSE 100 is Centamin, which operates the Sukari mine, the only operational one in Egypt. Centamin has made encouraging sounds about returning cash to shareholders. Its policy is to pay at least 30 per cent of net cash after paying its dues to the Egyptian government and spending what it needs to keep the mine ticking over.
ADVICE Buy Centamin and Fresnillo
WHY Gold has its place, but the best exposure is through shares in disciplined, well-managed miners
Christmas updates may not be the gifts they seem
Next is due to update shareholders on Christmas trading this morning, kicking off a frantic few weeks for the City’s retail analysts.
Christmas trading updates are significant events: many retailers make most of their annual profit in the run-up to the big day, so a disappointing update can wipe hundreds of millions off a company’s stock market value.
Yet by present stock market standards, these updates are brief. While a bank’s annual results now run to 300 or 400 pages, Christmas trading updates amount to a couple of paragraphs, often padded out with lists of bestsellers or boasts about the number of turkeys sold.
In reality, there is one number that counts amid all the PR guff — like-for-like sales. Stripping out the effect of new retail space, like-for-like sales purport to show how the underlying business is performing.
However, there is no definition of like-for-like sales, no specific standards and no external audit. Retailers don’t even have to disclose how they calculate them. The fact is that not all like-for-like numbers are equal, which makes comparisons from one year to the next, let alone from one retailer to another, difficult.
History shows it is not hard to “nudge up” like-for-like sales. Under Sir Terry Leahy, Tesco’s like-for-like number included sales from space created by extending stores. Safeway included “buy one, get one free” promotions. Its customers may have paid £1.99 for two packs of sausages, but the supermarket chain booked them as a £3.98 sale. There are more subtle “nudges”. Retailers can simply take out a few of last year’s most profitable days or a few poor ones this year.
Yet the most obvious flaw with the like-for-like yardstick is that it tells investors nothing about how profitable the crucial Christmas trading period was. Sacrifice profit margins or even sell at a loss and anyone can deliver the double-digit sales growth shareholders crave. Be wary in the coming weeks.
Ones to watch
Jan 9 Morrisons
Jan 10 Sainsbury’s
Jan 11 Tesco; M&S
Jan 23 Dixons Carphone
Jan 24 WH Smith
Jan 25 Asos
