Is the ‘safe haven’ asset still worth investing in?

This article is part of
Multi-Asset - November 2014

Gold has experienced a rather torrid time in the past 12 months, prompting investors to question the safety of this so-called ‘safe haven’ asset.

According to FE Analytics, in the year to October 28 2014, the S&P GSCI Gold Spot index made a loss of 9.23 per cent.

So is there still a place for gold in a multi-asset investment strategy?

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Rasmus Soegaard, portfolio manager, alternatives, at Old Mutual Global Investors, claims that gold is an “inherently bad investment” as the price of this asset is driven by speculation. But he reasons that gold does prop up some multi-asset portfolios.

He observes: “You see some multi-asset investors investing in gold and they will say it’s a risk-off asset – a potential inflation hedge.

“Ultimately, we don’t believe gold has any real utility. What determines its value?” he asks.

“This stands for most commodities, but particularly in the case of gold where there’s no cash flow. Supply is obviously a factor, while demand is clearly a factor, whether it be pure speculation or jewellery demand.”

But Martin Arnold, director of global foreign exchange and commodity strategist at ETF Securities, says: “Gold is recovering alongside rising equity market volatility as a ‘flight to safety’ bid for US Treasuries. Weak data from Germany… underscores the fragile state of the eurozone economy and bolsters the case for further easing from the European Central Bank, which may strengthen demand for gold as a monetary metal.”

He adds: “The precision and timing of a bottom is difficult to predict, but the relative valuations of gold and the precious metals at current levels are quite attractive.

“With gold prices having fallen close to the marginal cost of production and speculative futures market shorts in the metal having risen close to all-time highs, [the] bounce [in early October] could trigger a short-covering rally, helping to sustain momentum in the upward trend.”

It seems that the sentiment towards gold is fairly negative at the moment though, which means it may not be a current feature of many multi-asset portfolios.

Scott Spencer, investment manager in F&C Investments’ multi-manager team, says it does not have any direct exposure to gold. “Longer term, you may use it as a diversifier in your portfolio,” he notes.

“Shorter term, given that we don’t seem to be in an inflation environment. We don’t believe there’s the positive tailwind that would get us excited by the asset class.

“I could see us using it in some environments, but more in an inflation-driven environment than the one we’re in.”

Ellie Duncan is deputy features editor at Investment Adviser

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