As the traditional safe haven moves further from a loved asset to a loathed one, Bill McQuaker, head of multi-asset at Henderson, assesses the future for gold in portfolios.
Investors’ love affair with gold has cooled. As always, deteriorating performance has precipitated the change of mood – gold has fallen around 24% since October last year.
This disappointing outcome has felt all the worse because almost everything else has risen since European Central Bank president Mario Draghi assured us the euro would last forever. After roughly ten years of rising prices, perhaps investors had grown complacent.
The fact that many were recent converts to gold’s appeal meant there were plenty of weak holders liable to be shaken out by poor price action.
An unfortunate set of circumstances – several near simultaneous bearish reports from investment banks, coupled with rumours of clumsy selling in derivative markets – did just that, and set the rout in train. So much for the sanctity of the safe haven asset.
Looking ahead, the short-run behaviour of gold is likely to be determined by the state of investor sentiment and positioning. Following the recent sell-down, both of these favour a stabilisation of the gold price: a high level of bearishness among investors is currently allied with significant short positions by speculators.
That said, technical analysts point to $1500/ ounce as the level gold must reach before downside risk has diminished in their eyes. Technical analysis has its limitations, but it may be a little more influential than normal in a market such as gold, where the asset is famously difficult to value.
Many investors, ourselves included, have viewed gold as an asset that has interesting hedging properties in an uncertain world. The unprecedented wave of central bank ‘money printing’ that has occurred in the wake of the global financial crisis may produce some surprising outcomes in the longer term, even if the bankers would have us believe otherwise.
In a world where a sizeable group of investors still fears eventual deflation and believes that this will lead to a further bout of aggressive money printing, gold seems like an appealing store of value. Likewise, another camp of investors favours the metal for quite different reasons.
They fear inflation is the inevitable consequence of current central bank policies and view hard assets (those with intrinsic value), including gold, as one of the few refuges available for the tough times that, they believe, lie just around the corner.
The last 12 months has suited neither group. The consensus appears to believe that the central banks’ actions will produce the best of all possible outcomes – accelerating non- inflationary growth that will facilitate an ‘elegant’ exit from unconventional monetary policies and, eventually, higher interest rates. In this scenario, the one thing you do not want to be holding is an asset with no exposure to growth, paying no yield.
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