Few if any financial assets have the longevity and charisma of gold. The yellow metal sparkles in jewelry, is awarded to first-place finishers in athletic events and has played an important role in the world’s monetary affairs for millennia. It has long been viewed as a symbol of wealth, and it’s considered a so-called safe-haven asset during calamitous times.

The last point plays into gold’s reputation as being a store of value, yet gold isn’t immune to volatile price swings. Factors that affect the price of gold range from inflation and deflation to fluctuations in the U.S. dollar, interest rate movements and geopolitical turmoil, among other things. Think back to 2022, when the conflicting forces of the Russia-Ukraine war, soaring inflation, aggressive Federal Reserve interest rate hikes and a strong U.S. dollar took gold on a wild ride that gave it a strong start to the year before it plunged nearly 18% between early March and early November.

The precious metal rallied to finish the year with a 0.3% gain, in part because the dollar weakened in the fourth quarter, which benefited gold because it’s priced in dollars and a weaker dollar makes gold less expensive to buy. It also got a boost from strong gold demand from central banks, whose purchases offset outflows in exchange-traded funds holding physical gold. Gold’s small gain was a victory in a year when the S&P 500 sank 19% and the Bloomberg U.S. Aggregate Bond Index dropped 13%.

Astute market timers could have made a killing by correctly playing gold’s mood swings. But astute market timing is hard to do consistently for gold or any asset class, which is why gold advocates believe the metal should have a dedicated place in investment portfolios as a hedge against the vicissitudes of a fickle world.

“We believe it’s important to have a strategic position in gold as a potential hedge against the unknowns,” says Thomas Kertsos, co-portfolio manager at the First Eagle Gold Fund. He stresses the importance of viewing gold as a strategic hedge rather than a speculation hedge.

First Eagle Investments, an investment management company in New York City, launched its gold fund in 1993. It sports an impressive long-term track record, including top-quartile performance in Morningstar’s equity precious metals category during every measurable period from one to 15 years (as of early January).

Kertsos has been a co-manager of the fund since 2016. His current partner, Max Belmont, came on board in 2021. When looking at the fund’s performance during Kertsos’s tenure, it’s clear that he has grabbed the baton from his predecessors and run with it. On an annualized basis the fund has been its category’s third best-performing fund during the past five years and the top fund during the past three years.

The Fed
The safe-haven angle is a big part of the First Eagle fund’s message. But what exactly is a safe-haven investment? Many people think of it as an asset that provides protection when stuff hits the fan and traditional financial assets—particularly equities—get clobbered.

Another way to frame it is that a safe-haven investment should retain its value over time so that it keeps up with inflation and provides ballast that enables investors to add risk to other parts of their portfolio.

Kertsos posits that the past 400 years of financial history has demonstrated gold’s ability to maintain its value in real terms during the biggest macroeconomic dislocations. “Gold has had big pullbacks in real terms, but historically it has shown that it comes back to its average long-term purchasing power.”

“Safe haven” sounds soothing and comforting, but sometimes that’s not enough to motivate thrill-seeking investors to add gold to their portfolios. That said, those folks might want to reconsider if the Federal Reserve follows through with its announced plans to begin lowering the federal funds target rate later this year.

That’s because Fed rate cuts weaken the dollar and produce lower real interest rates, which pushes up inflation. That’s a positive backdrop for gold.

According to Bloomberg data, bull markets in gold occurred after the Fed ended its past three rate hike cycles: Prices jumped 57% after rate hikes in 2000, rose 235% after 2006 and rose 69% after 2018.

“The Fed pivot is key for the structural outlook for the price of gold,” Kertsos says. Nonetheless, he cautions the Fed could pivot on its pivot and back off from its rate cut plans if inflation re-accelerates or if the economic momentum continues. That could create short-term volatility for gold prices.

Bullion Vs. Miners
What differentiates the First Eagle fund from competitors is its concentrated portfolio—it held 19 positions as of November 2023. “In general, competing funds often hold 50 to 60 securities,” Kertsos says.

The fund also differs from many of its competitors by holding a significant stake in physical gold. The top 10 holdings in a number of its top rivals are stocked with miners and don’t include bullion among their largest positions.

At the end of November, gold bullion was the First Eagle fund’s largest holding at 15% of its portfolio. “Traditionally, bullion has been between 15% and 23%. It’s now at the low end because we’re finding good valuations in specific miners,” Kertsos says.

The price movements of gold bullion and miner stocks aren’t always in sync. For starters, gold mining stocks are more correlated to the public market, which can either hurt or help their valuations. Moreover, the management teams, cost structures and mine quality can differ greatly among mining companies, as can the logistical challenges of mining in different areas.

“No two mines are alike in terms of the geological setting, plus the management teams and the balance sheet of the business and so forth,” says Max Belmont. “With miners there’s a huge dispersion in terms of quality, asset base and potential returns from their investments.”

Belmont and Kertsos evaluate a mining company’s assets by gauging its proven and probable reserves, and they invest more in companies already in production. They seek a margin of safety by looking at a company’s operation, capital and geopolitical risks.

“You want to find gold mining companies that are able to grow gold production and gold reserves per share,” Kertsos explains. “If the management team can do that through the cycle it should be able to grow free cash flow per share. So we need to have good judgment about which management teams can grow their company through operational execution, exploration success and countercyclical capital allocation.

“We don’t mimic any index. We take a very bottom-up approach,” he adds.

According to First Eagle, $10,000 invested in the gold fund’s Class A shares at its inception in 1993 would’ve been worth nearly $46,000 as of last year’s third quarter, whereas the same investment in the FTSE Gold Mines Index would have seen a loss and been sitting around $8,400. The fund tops the index over the 10-, five- and three-year periods as well, though the disparity was much less within those various periods (both the First Eagle fund and the index returned less than the hypothetical $10,000 during the most recent three-year period).

Old And New
Besides gold, the most investable precious metals include silver, palladium and platinum. Palladium and platinum have various industrial uses, but they’re known mainly for their role in catalytic converters that reduce automobile pollution. As a result, their prices are typically tied to swings in the automotive industry.

Silver is used both in jewelry and in industrial applications such as electronics and solar power. The First Eagle fund recently had a roughly 5% allocation to silver bullion.

“Silver, along with oil, have the most industrial uses among commodities,” Kertsos says, adding that it’s important to understand economic cycles and how they affect the relationship of gold and silver valuations. He notes the price of gold bullion dropped initially during the global financial crisis but ultimately rose 5.8% in 2008, while silver ended that deflationary year down 28%.

“Silver does worse than gold during deflationary environments, but does better than gold in inflationary environments,” he explains. “It’s one of the few commodities that usually does better than gold during periods of inflation.”

Precious metals are as old as Earth itself, but a newfangled item has emerged to rival gold as an alternative asset. Bitcoin, which arrived as a cryptocurrency in 2009, was touted last October by asset management firm AllianceBernstein as a safe-haven asset whose performance had topped gold during the previous five years. (Neither asset pays a dividend, which is a negative for some investors.)

Naturally, the folks at First Eagle are quick to defend their turf. One big problem with bitcoin, they say, is that it’s much more volatile than gold. “But more importantly, given that it’s driven by technology and is a man-made construct, it can’t compare to gold’s long-term track record,” Belmont says. “Bitcoin is an asset class that trades more like a growth stock rather than driven by the influence of real interest rates.”

Never Static
The World Gold Council’s 2024 investment outlook points out a number of factors that could either help or hurt the price of gold. A soft landing for the U.S. economy, for instance, could mean flat or slightly negative returns, whereas U.S. Treasurys and U.S. equities might benefit. The organization based that projection on the past two soft-landing environments—one from the mid-’80s; the other from the mid-’90s.

But gold could get a boost from geopolitical tension as key elections take place in certain major economies. The price of gold could also stand to benefit if central banks continue buying the metal as a way to diversify their reserves (and thus reduce their reliance on U.S. dollars). Any widening of the Israel-Hamas conflict—its outbreak in October gave gold a boost to close out last year—is a wild card.

Gold has been around forever, but it’s never static. Evidence suggests it was first used in jewelry and other decorative objects as early as 6,000 years ago. Today, a microscopically thin layer of gold covers the mirrors on the James Webb Space Telescope, helping it gather and measure infrared light coming from the deepest reaches of space and capture amazing images of objects located billions of light years from Earth. And through it all, gold manages to maintain its value, hammering home the point made by Kertsos and other gold proponents that it can be an effective insurance policy for portfolios.

“We have very loyal clients who believe in our philosophy where we say there are many known unknowns and unknown unknowns, and it is important to own gold and be agnostic about the short and medium terms of where gold prices will be,” he says.