Schroders Private Bank has trimmed its gold position in the view the precious metal faces downside risk to prices from current levels.
Robert Farago, head of asset allocation at the firm, said there are three main concerns which have spurred him to cut exposure to gold.
‘First, the strong performance over the last eleven years means that the price of protection against an extreme outcome is high,’ said Farago.
‘Second, the last six months has seen an increase in correlation between gold and other risk assets. While this is not readily explainable and therefore may be somewhat coincidental, it does reduce the metal’s attraction as a portfolio diversifier,’ he added.
The third factor which has left Farago questioning gold is his lack of convinction a deflationary environment will prove favourable in the short-term.
‘This would produce a liquidity squeeze and gold may well prove a source of funds since almost all investors are sitting on profits,’ said Farago.
Nonetheless, the private bank is maintaining an allocation to the metal, and Farago sees merit in holding it for the long-term.
He said: ‘It is not difficult to appreciate the value of a metal of which there is just 170,000 tonnes in existence.
‘For private clients who can afford to tuck away a meaningful sum of money in gold without worrying about its performance over the next decade, this seems a highly sensible option.’
The price of gold recently reached record highs of above $1,900 an ounce during the equity market sell-off last August.
Farago also highlighted the fact it hit a record when measured against UK inflation based on history going back to 1560, which he said means there are three potential outcomes for the precious metal.
* Gold is expensive and is therefore likely to fall in price
* The rise in gold is a portent of inflation to come
* The first 400 years of data on gold covers a period when gold was money, whereas the last 40 years cover a period of fiat money, for which there is no true historical comparison. Farago said this would therefore make it impossible to draw any strong conclusion.
Farago points out gold looks expensive against stocks, although not out of line with other commodities, supporting the view hard assets are rising in price to paper assets, over fears of currency debasement.
In contrast with Farago, Investec’s Enhanced Natural Resources fund managers Bradley George and George Cheveley are marginally bullish on gold and expect it to average at $1,675 in 2012. The managers have topped up their gold weighting, in the view share will close on better performing gold spot prices over the coming months.