• Gold is undervalued according to a record number of fund managers
  • Last time gold was considered undervalued, the price surged
  • BAML surveyed 175 money managers with $543 billion in assets under management
  • 34% of investors believe protectionism is the biggest threat to markets
  • Gold viewed as the best protectionist investment by a third of investors

gold-undervalued-2017Gold in USD – 10 Years (GoldCore)

For the third time in a decade fund managers surveyed by Bank of America Merrill Lynch (BAML) believe that gold is undervalued. After the last two occasions the price of gold shot up.

The Bank of America Merrill Lynch Fund Managers survey spoke to 175 money managers with $543 billion in assets under management. It provides key indicators each month of those who run and manage the world’s investments. The news that they are buying gold and believe it is undervalued, is worth paying attention to.

As we often mention the status quo amongst money managers is for them to be bearish about gold, regardless of the price and state of the global economy. But this month, a majority of those surveyed (by a net margin of 15%) believe that gold is a buy, something that hasn’t been seen since January 2009 and January 2015.

As Brett Arends writes on Marketwatch, this is significant:

“The latest survey opinion is of more than passing interest. These guys typically do not hold gold in their portfolios. Indeed, to buy some, most of them will have to go through investment committees, which takes weeks or months. But if they are interested, and they stay interested, that will presumably drive more demand for gold as an investment in the months ahead.”

But why are they only interested now, what has them running for gold and what does this mean for gold investors?

Inflation, stagflation and protectionism

The interest in gold comes from two parts.

Firstly the clear risks on the horizon. Namely stagflation, inflation and protectionism. As well as rising interest rates and potential conflict (trade and otherwise) around the world. The second part is our increasingly familiar friend, uncertainty.

This may come as a surprise given the boost to economic projections thanks to Trump’s win. But even an initial enthusiast of Trump’s policies Ray Dalio, head of the world’s biggest hedge fund, Bridgewater Associates, has since changed his mind. In a recent letter to clients he explained:

“Nationalism, protectionism and militarism increase global tensions and the risks of conflict. For these reasons, while we remain open-minded, we are increasingly concerned about the emerging policies of the Trump administration.”

In the BAML survey, fund managers are optimistic about the macro outlook, with 23% saying they expect a “boom” compared to 1% one year ago but when it comes to the fundamentals things don’t look so good, with 43% saying they expect “secular stagnation”.

36% said European elections raising disintegration risk were the biggest tail risk closely followed by a trade war (3%) and a crash in global bond markets (13%).

The most likely bear market catalyst according to 34% of respondents was protectionism, followed by higher rates (28%) and a financial event (18%).

So whilst things might be looking rosy at the moment, the future is making investors’ nervous. It is the uncertainty surrounding these potential events, not knowing what specifically they will be, what they will impact and when they might happen that adds to list of unknown uknowns that we were talking about earlier this week.

Trump trade could take you too close to the Sun

Staying too positive about Trump’s impact on the US and wider economy has lead some to issue warnings. Michael Hartnett the chief investment strategist at BAML and his team wrote of the Icarus trade, earlier this year.

“Our tactical view: after a Jan/Feb wobble, we believe stocks & commodities will have one last 10% melt-up in H1. Call it the ‘Icarus trade.’ The current melt up, which started back in Feb 2016, will be followed by a meltdown later in ‘17,” they wrote.

For those who need reminding Icarus was the son of Daedalus. When his father made him some wings held together by wax he was warned not to fly too close the sun, but Icarus ignored his father’s warnings and did just th