Gold has fallen sharply but the idea that it is no longer an important portfolio asset is disputed by wealth managers who argue that geopolitical and other risks have not gone away.

A number of wealth management institutions have insisted gold remains an important diversification asset despite recent heavy falls in the price. Gold has fallen by as much as 14 per cent in two days.

Gold - often considered a “fear indicator” and safe-haven asset - has seen the biggest decline in more than two years. Yesterday at around 15:30 GMT (Tuesday), spot gold fetched $1,388 per ounce. Last Friday, it fell through $1,525 per ounce, an important chart level and also broke below £1,000 per ounce (for those tracking gold prices in sterling). Gold is some way below its September 2011 record high above $1,920 per ounce.

Concerns of weaker growth rates in China, gold sales by crisis-hit Cyprus, and expectations of a stronger dollar exchange rate – which is typically negative for gold – have hit the price, commentators say. Also, investors who have been long-term gold bulls have, at least for the time being, chosen to take profits, perhaps disappointed that the price level has stalled in recent weeks.

The saga also raises questions about the robustness of exchange-traded instruments, such as ETPs, which track the gold price.

According to BOOST ETP, a firm operating in this space, gold ETPs “continued to see huge trading and sustained outflows”.

“Global gold ETPs traded $14 billion on world stock exchanges, with trading volumes up 630 per cent from the three month average. Gold ETP holdings have fallen from 84.6 million ounces to 76.6 million ounces as of Monday, a fall of approximately 10 per cent or around $11 billion,” the firm said.

Viktor Nossek, head of research at BOOST ETP, said:  “Potential gold reserves sales to fund the financial crisis by indebted countries other than Cyprus instigated Friday’s 5 per cent gold price plunge. With central banks’ net purchases having contributed approximately 14 per cent of total demand for gold in Q1, a key supporting factor for gold prices is eroding. Given the momentum in gold, its high price in real terms, incentives to hoard gold by central banks at this stage is reduced.”

“The speed and extent of the sell-offs seems excessively brutal, so short covering may drive a quick rebound. But the damage has already been done: investor confidence in the commodity as a result of the 15 per cent drop over the last week has been shaken, and net outflows are likely to continue until prices stabilise.”

Reduced exposure

As reported previously by this publication, HSBC Private Bank has cut its gold outlook although it thinks the sell-off has run farther than it would have expected.

“We think the correction has gone far. Upside may be limited in the short term but we still see gradual upside in the medium term,” the bank said in a note.

“Gold prices struggled to advance in 2012, in spite of many supporting factors, such as ample global liquidity through quantitative easing, European turmoil and concern over sovereign ratings. In part, we believe that it is the strengthening dollar and a reduction of global tail risks that held gold back,” it said.

“Looking ahead, we think that gold prices should find a floor around current levels but may struggle to advance in the short term, as the dollar remains well supported and investors digest the volatility and some may potentially scale back their holdings,” the bank added.

Momentum

At Kleinwort Benson, the private bank’s chief investment officer, Mouhammed Choukeir, said momentum in the market is turning against the yellow metal.

“However, we do not own gold in portfolios as a pure momentum play. We own gold because of its defensive characteristics in times of financial stress and because its sensitivity to inflation is better than most other asset classes. We acknowledge that momentum is currently against gold, which is why we are comfortable having only modest exposure. Given this, our rationale for retaining some gold exposure in multi-asset portfolios remains intact, but we are unlikely to increase this exposure whilst momentum remains negative,” he said.

“While gold is a relatively volatile investment – exhibiting 18 per cent volatility versus 15 per cent for equities – it is an attractive investment in diversified portfolios for two key reasons: it is defensive in times of financial stress, and its sensitivity to inflation is better than most other asset classes,” he said.

At Rothschild Wealth Management, the firm said it continues to hold gold.

“Is the world now much safer than it was at the start of the year? Is the financial system more stable? We don’t think so. In fact, recent tensions in Korea and Iran have only added to substantial geopolitical risks. Bank depositors in Cyprus have been hit and capital controls have been put in place. At the same time, monetary policy is becoming more extreme across the world, with Japan’s central bank accelerating its stimulus programme in an attempt to boost inflation almost whatever the cost. In our view, all of these factors mean gold remains a valuable asset,” it said.

World Gold Council

At the World Gold Council, an organisation that provides research on the market and represents much of the industry, it declined to comment on specific price shifts, but said the market and political world have been through an "exceptional period" in recent days. 

Marcus Grubb, managing director, investment, at the WGC, said: "When looking at gold price movements it is important to remember that demand for gold is driven by a diverse range of factors and these should be taken into account across the world. 

"Taking a short term view of any asset’s performance is fraught with danger; we believe that despite the current turbulence, the long term fundamentals of the gold market remain intact. There are many different types of holders and buyers of gold, from investors who buy it as a long-term store of value and preserver of wealth, through to speculative investors who seek points in the market to enter and exit making a trading profit. Any appraisal of the investment market for gold needs to take all of these facets into account.∙         Demand for physical gold remains strong in India and China in particular. Between them they account for over half of the annual global demand for gold," he said.

"Irrespective of the current exceptional situation in Cyprus, central banks, particularly in emerging markets, have been net buyers of gold for several years and the conditions and objectives driving these purchases remain in place. In February, the South Korean central bank purchased 20 tonnes of gold to help it diversify its reserve asset balance sheet," he said. 

"The amount of gold under discussion in Cyprus is 10 tonnes. There would appear to be a healthy central bank market for volumes of this type and the gold market is sufficiently deep and liquid to easily absorb such volumes without undue disruption. Mine production remains relatively flat and new sources are increasingly scarce and more expensive to develop. Gold supply from recycling has climbed steadily in recent years to meet growing demand," Grubb added.