Trojan Fund Europe

Gold demand comes from four main sources: retail and institutional investors, central banks, the jewellery trade, and industrial uses (the latter being relatively small). Recent price strength has prompted suggestions that investor flows are overly driving the market, raising the risk of a reversal in more speculative positioning. Volatility is inevitable. However, we believe a more structural force has underpinned gold’s resilience in recent years: sustained central bank accumulation as they increase bullion’s share within their reserves. With fiscal concerns, inflation, diversification away from the dollar, and geopolitics likely to remain prominent on central bank/government agendas, we expect this support to continue.

As longstanding investors will know, we take an active approach to managing currencies, hedging back to euros significant exposures where we do not believe we are being paid to take the risk. The UK and US constitute our largest gross currency exposures today, reflecting our views on the valuations and prospective returns available in their equities and bonds.

Based on our assessment that the fiscal and economic prospects for the UK are weak, we hedge all the Fund’s sterling exposure back to euros. With the dollar, we have increased the hedge this year but continue to retain some exposure. The dollar remains unique in its trusted status alongside deep liquidity. It is unlikely to be unseated from this position overnight. We believe the dollar will continue to be viewed as a safe haven to a greater extent than the euro. We also expect that the US economy, largely thanks to its more business-friendly regulatory environment, is likely to continue to fare better over time. For these reasons, we retain 8% net dollar exposure in the portfolio.

Over the past eight months, we have also built a holding in short-dated Japanese government bonds. The yen, which is at multi-year valuation lows, also benefits in times of crisis thanks to the substantial carry trade[1] that tends to be repatriated into the currency when risk assets are sold.

[1] A carry trade is when investors borrow in a low-interest rate currency, like the yen, to invest in higher yielding assets elsewhere. In times of market stress, these investors often unwind these positions and move money back into the original currency, causing it to strengthen.