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End of the golden age: could gold’s fall from heaven be eternal?

Fund managers disagree over whether gold, once regarded as a safe haven, is simply going through a tough patch or has permanently lost value

End of the golden age: could gold’s fall from heaven be eternal?

Gold has taken a severe battering over the past few years with the price plummeting from $1,921 an ounce in September 2011 to $1,147 last week. For an asset class that was long considered a safe haven to have suffered a capital loss of 40% has shocked gold investors. Gold has traditionally been an asset to which investors have retreated to safeguard themselves from stock market turbulence and political upheaval.

In the wake of the global financial crisis eight years ago, many investors became seduced by the prospect of having exposure to gold as a tangible store of wealth and long-term protector of value. But investors are now divided over whether gold is even a sensible investment at all.

Its supporters insist it still has a part to play in a properly diversified portfolio, while critics argue there is no way that it can be deemed attractive given the economic backdrop.

Rory McPherson, portfolio manager at Russell Investments, is unimpressed by gold bulls.

‘It’s had a 40% price drop in a world where everything else, including bonds and equities, has gone up,’ he said. ‘All risky assets have done really well as the environment has been very good, but gold has been hammered.’

No sign of a gold rush

Despite the temptation of buying after a price fall, McPherson does not see gold as a buy today. ‘Normally when we see a big price drop we are very excited and it flashes up as something we could potentially buy but we don’t see that with gold,’ he said. ‘We don’t expect the price to recover.’

He said an expected interest rate hike in the US later this year or early in 2016 was a prime reason why he was steering clear of gold for the time being.

‘Gold is denominated in US dollars,’ he said. ‘We see the dollar getting stronger so gold will become relatively more expensive for the main demand countries like China and India.’

Inverse correlation: dollar up, gold down

Source: Lipper

Catastrophe insurance

Citywire A-rated David Coombs, head of multi-asset investments at Rathbones, branded gold a ‘catastrophe insurance policy’ for one-off events that had only made money a handful of times over the past four decades – and argued that even that was not guaranteed.

James de Bunsen, a fund manager within Henderson Global Investors’s multi-asset team, said owning gold had probably cost him 50 basis points over the past year, but insisted it still made sense to have at least some exposure.

‘We hold gold at the moment and the main reason is that it’s a good portfolio hedging instrument,’ he said. ‘However, we don’t have a view that the gold price will be X by the end of the year as it is almost impossible to put a figure on it.’

He attributed the dramatic gold price decline to factors such as decreasing fears of a global double-dip recession. ‘That took quite a lot of people out of the market that were using it as a hedge,’ he said. ‘The key was the meltdown risk having diminished.’

De Bunsen said the arguments in favour of holding gold included the prospect of physical buyers coming into the market and the ongoing global uncertainty.

‘Gold can rise in price due to things that come out of the blue, such as geopolitical issues,’ he said. ‘This isn’t really something that you can anticipate but (such situations) can escalate pretty quickly.’

He said a prime example was China. ‘You can’t completely discount the fact that China is worse than a lot of people are thinking and if it was to have a major wobble that would boost the gold price significantly,’ he said. ‘It is also a good hedge against unexpected inflation.’

Going for gold

Gold has formed an important part of a number of well-known managers’ portfolios. The Jupiter Merlin team, led by John Chatfeild-Roberts, started buying ETF Securities Physical Gold in February and March of 2008 as an insurance policy against something going horribly wrong. At one stage the team had over 10% in the precious metal, which performed well for them from 2008 to 2011, but it sold a fifth of holdings in August 2011. Today it has a 2% position.

Citywire + rated Alastair Mundy has exposure to gold and gold shares as part of the defensive stance he has adopted in the Investec Cautious Managed fund as a result of concerns equity market valuations are very high and global debt levels are still increasing.

‘We accept that gold is very difficult to value as it pays no dividends or interest, but we do not believe that makes it valueless,’ he said. ‘With central banks having aggressively printed money for almost a decade we believe the store of value that gold provides when compared to ever-increasing amounts of paper money is very genuine.’

David Donora, head of commodities at Columbia Threadneedle Investments, believes gold is a useful hedge against the debasement of currencies. ‘Gold – more so now than in the last few years – is good to have as part of a larger, diversified portfolio,’ he said. ‘On the metric that it has corrected hugely it represents much better value than where it has been.’

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