Gold could provide sensible hedge

"The final quarter of 2011 provided a tumultuous end to an extraordinary year, but little has changed to alter our longer-term perspective," said Stewart.

"Amid what are likely to remain challenging investment conditions, we continue to see the best risk-adjusted opportunities among the equity and corporate debt of high-quality businesses operating in the more stable market sectors, which have greater scope to grow regardless of the broader macroeconomic backdrop.

“In difficult and volatile circumstances, the ability both to survive and deliver a dividend should be an increasingly valuable attribute. Those investments that can retain a growing return profile should be especially rewarded.

"With the dividend yield on a basket of stable equity sectors near 3%, valuations are also attractive compared to those of much of the last 25 years. Furthermore, the yield sacrificed versus the typical US corporate bond is less than 1%, compared with an average of more than 4% over the same timeframe," Stewart explained.

"As during periods in 2009 and 2010, investment in stable equity sectors may appear overly cautious at times. However, the headwinds to economic growth, the limited scope for policy stimulus, and the lesser potential for an inventory-restocking-led boost to activity, suggest that there is little reason not to expect the burgeoning re-rating of stable businesses to continue in the period ahead."

"Meanwhile, we see little reason for government bond yields in the ‘safe havens' of the US, UK, Germany and Japan to rise significantly in the very near term, given the strong likelihood that interest rates will remain at their current levels for a considerable period and given the possibility that greater financial market intervention will place further restrictions on ‘free' markets," he continued.

"However, in a world which is inherently more volatile, and in which credit risk has entered the sovereign sphere with heightened concern about the sustainability of high levels of government debt, the low level of yields on the bonds of governments that do retain credibility appear to leave little margin of safety. In this context, we believe there is less long-term attraction in holding these as return-seeking assets in multi-asset portfolios.

"Gold has suffered a near 20% decline since its 5 September closing high of US$1,900 per Troy Ounce. This may have been partially the result of market surprise at the unwillingness of the US Federal Reserve to launch ‘QE3' - the central bank relying instead upon ‘Operation Twist', which it announced following its September rate-setting meeting.

“It may also have been attributable to the inability of the eurozone leaders to agree a package that would allow the European Central Bank to pursue a similar ‘money printing' agenda in December," Stewart explained.

"After more than a decade of strong price appreciation, corrections are inevitable and it is worth recalling that the gold price fell by a third between the market extremes of March and October 2008.

"As suggested, the orthodoxy within most modern central banks (rightly or wrongly) is that QE-type policies can be, and have been, effective. Combined with an economic backdrop that is likely to continue to see economic growth lag that which is necessary to bring about a significant decline in unemployment, and with rebasing effects that are likely to lead to a sizable moderation in headline inflation over the course of 2012, this makes the prospect of further money-printing policies highly likely. Under these circumstances, gold still looks like a sensible hedge," he added.

"Furthermore, with the performance of the gold mining sector having tracked that of gold in 2010, the divergence in returns between gold-related equities and the gold price has been disappointing," Stewart said.

"However, with the dividend yield on the Datastream global gold mining index now back at its 2008 peak level, and with several companies raising their payouts, the case for these stocks to reflect the increase in the underlying price remains strong.”