Gold loses attraction as portfolio diversifier

Robert Farago, head of asset allocation at Schroders Private Banking, said it remains a sensible long-term investment but Schroders has downsided risk to prices from current levels.

The price of gold hit a record high at $1900.23 a Troy ounce last September. (Gold cost $1650.35 per Troy ounce on Monday.) Mr Farago suggested the recent rise could mean gold could either fall in price soon, or is a portent of inflation to come in future months.

He said: “The strong performance over the past 11 years means that the price of protection against an extreme outcome is high, but the past six months has seen an increase in correlation between gold and other risk assets.

“This reduces the metal’s attraction as a portfolio diversifier. I am not convinced that 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.”