Has gold lost its ‘safe haven’ status?

The London PM Fix price of gold dropped from $1,583.5 on April 2 to a low of $1,380 per ounce on April 16. The sharpest fall, however, occurred in the space of a few days with a 10 per cent drop between April 12 and April 16.

Commodities as a whole have been weak but prices were pushed even lower as investors withdrew from gold-related exchange-traded products combined with weaker economic data from emerging economies, particularly China and India.

Frances Hudson, investment director and global thematic strategist for multi-asset investing at Standard Life Investments, says to understand the falls you have to understand the initial rises.

She adds: “A lot of people bought-in through ETFs for a gold representation. The only problem is that gold is a commodity and doesn’t have an income, and buying futures incurs costs. When the price is going up it is not a problem but when it falls you also have the rolling costs, which are whittling away at your investment.”

Ms Hudson explains that as bonds and equities produced better returns than gold, investors withdrew money, which pushed the price down.

David Coombs, head of multi-asset at Rathbone Unit Trust Management, suggests that gold started to weaken following the comments from the European Central Bank chairman, Mario Draghi. In July 2012 he said that the central bank would do “whatever it takes” to support the euro.

“I think the momentum behind gold ran out of steam after Mr Draghi’s statement last year. It took a bit of the systemic risk out of the market and gold started to weaken after that.”

He adds that another cause for the gold price to stop rising is whether quantitative easing could slow down or even stop.

Mr Coombs says, “People love it or hate it. I don’t hold gold because these factors undermine it. If the US was going back into recession then more QE could occur. I would think about buying back into gold then.”

Tim Drayson, senior economist at Legal & General Investment Management, says: “If the world economy was fully recovering and central banks kept a tight hold on the supply of paper money, then gold would lose appeal. But the price decline does not reflect a more optimistic assessment of the world economy. Gold still represents a good long-term hedge against central bank monetisation of debt and inflation and the recent price declines make it even more attractive.”

Nyree Stewart is deputy features editor at Investment Adviser

Expert view

What’s the verdict for the future of gold prices?

Nitesh Shah, research analyst, ETF Securities:

“The longer term fundamentals for gold remain strong and ultimately should re-assert themselves once cyclical and technical factors move again in gold’s favour.”

Frances Hudson, investment director and global thematic strategist for multi-asset investing, Standard Life Investments:

“Gold could continue to decline, it looks like a type of bubble deflating. From a fundamental supply/demand perspective some of the commodities, including gold, had looked mispriced.”

Russ Koesterich, chief investment strategist, BlackRock:

“In the near term, we do not have a strong view about the short-term direction of gold prices and cannot say whether gold has hit a bottom. Determining valuation levels for gold is notoriously difficult since gold does not have a cash flow that can be discounted. Additionally, it is hard to assess supply and demand dynamics since there is very little industrial or practical demand for gold.”