Why gold is no longer a safe haven

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.

‘There is a feeling that gold pricing is in for a period of weakness,’ said Citywire AAA-rated Tony Lanning of the Henderson MultiManager Absolute Return fund .

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.