Gold historically occupied its unique place in human fascination because it never tarnishes. In investment terms however, the precious metal’s appeal is looking increasingly in need of a polish.
It’s not just the pricing disappointment, although at $1,568 an ounce, down more than 17% since its September 2011 peak of $1,898, there is certainly that. Its hallowed diversification and safe haven attributes are also looking increasingly threadbare.
Its correlation with the Dow Jones Industrial Average has spiked sharply since last September’s price high, from a negative figure of -0.874% to a positive 0.857%.
That correlation figure is interesting because unlike capital pricing, it is not explicable by looking at dollar appreciation. Gold is now being sold, not bought, through periods of portfolio deleveraging.
Lanning had held a ‘structural’ 3% stake in gold for the 3.5 year life of the fund, until April, when he sold it down to 2%, saying some of its defensive attributes had been tarnished by investor disillusion.
‘Gold has been a genuine diversifier, but may have got a bit ahead of itself. In the short term, it could be that it trades as a risk asset, as people reduce their exposure,’ he said.
Some of that trade is already being unwound, with the mighty SPDR Gold Trust falling from a peak of £4.6 billion to £4.1 billion in the last six months, a more than 10% decline. While money has been volatile, a 24-hour outflow of £900 million last week briefly drove the trust from bid to offer.
Much can be explained by dollar appreciation. Versus a basket of currencies, the greenback has appreciated 5% since last September as the US Federal Reserve disavowed further quantitative easing.
Robin McDonald, manager of the £780 million Cazenove Multi-Manager Diversity fund, who sold down his previous 3% stake in gold in September, views the behavioural change in gold pricing as a function of dollar appreciation, rather than a separate issue.
He adds that recent history has misled investors into viewing a US equity recovery as being synonymous with a weak dollar, while the Fed had developed a growing appreciation that easing was not a zero sum game. In particular, input inflation was now the biggest brake on the recovery.
‘I have a lot of sympathy for those who continue to back gold – all the arguments that it is protection against devalued currencies and a safe haven and a currency proxy,’ said McDonald.
‘[And] we do anticipate the European Central Bank (ECB) doing something in the immediate future, but we don’t know what. If they go for something that would ease liquidity, that would be positive for gold. But when the dollar has been devalued for 10 or 11 years – on trade-weighted terms it is down something like 40 or 50% - I think the Fed appreciate they are reaching the end of that road.
‘When we have an oil price at around $120, it is becoming obvious that the risk/reward trade-off is getting quite high. These are serious headwinds for the US economy that they are creating.’
MacDonald added that as long as the dollar kept up its recent pressure on the gold price, hot capital flows out of the asset class would mean that gold traded in line with portfolio deleveraging.
‘If the ECB did something then you would expect the dollar to rise relatively. But everyone is so short the euro that perversely, it is likely the dollar would slide [on the short squeeze], which would be a big positive for gold.’