All that that glitters
is not gold
Gold has dipped below Rs
25,000 per 10 grams, to trade at a five year low and many investors wonder if
the yellow metal has lost its glitter and should it be a part of the investment
portfolio?
Gold has failed to sparkle
for investment portfolios and the most reliable hedge against risk and
inflation has not worked well in the last few months.
Investments in gold has come
a big disappointment of late and during a period in which the overall world
economic situation having lack of overall macroeconomic stability and fear of
default by a number of countries and the stock market crash in the largest
Asian market would normally push the price of gold up but the big question to
answer is that is gold losing its traditional role in a diversified investment
portfolio.
In the last few
years gold an as investment option on a portfolio level has been very
disappointing as it has not performed its traditional role as a good hedge to
risk and inflation during critical periods by performing well during risk off
periods where other equity markets have performed very badly.
It did not
participate in the surge upwards in nearly all financial asset prices; and it
has not provided protection in the more recent downturn in risk markets.
Throughout this period, gold has not benefited from rock-bottom interest rates
that compensated for one of its main disadvantages as a financial holding —
namely, that gold holders do not earn any interest or dividend payments. It has
also shown an unusual lack of sensitivity to multiple geopolitical shocks,
Greek-related concerns about the single European currency, and the vast
injection of liquidity by central banks and the problems faced by the largest
Asian economy.
The performance
of gold has been so dreary that a number of professional investors and hedge
funds have bet against the asset there by adding further pressure and resulting
in the price to decline almost 18% in the past 12 months, owing to the
technical weakness on the charts.
This historical
anomaly could be attributed to several reasons and cyclical factors have played
a role but the main factors for this are more structural in nature.
·
With
the explosion of equity exchange traded funds globally to the deepening of interest
and availability of sophisticated credit products investors have found more
direct ways to express their views about the future, particularly in a world in
which central banks have had such an important influence on asset prices.
·
With
lack of meaningful inflationary pressure along with the general decline in
interest in commodities among institutional investors due to slower global
growth gold has become a lot less attractive to investors.
·
Gold
faces the growing risk of lower demand from central banks, once deemed reliable
core holders, part of this is driven by the fall in holdings of international
reserves by the emerging world, particularly as they try to cope with the
impact of lower commodity prices.
·
The
historical correlation have broken down, the analytical case for investing in
gold has been increasingly challenged at an overall portfolio level there by
resulting in the overall lack of demand and putting pressure on the price.
·
Due
to the lower prices of gold there has been an increase demand in physical use
of gold in form of jewelry and ornaments but this demand is too small to offset
the erosion of investor at an overall all demand supply level.
Assessing the
cyclical versus secular/structural balance of these factors, it is hard not to
conclude that gold may well be experiencing an erosion in its positioning as a
core holding in diversified institutional and retail investment portfolios. The
more this happens, the more enticing it will be for fast money to short the
metal as a way of inducing even greater sales by disappointed core holders.
This situation
is unlikely to change soon but it need not be terminal. A shift would probably
require a broader normalization of financial markets, including a diminution in
the direct and indirect role of central banks in determining asset prices and
their correlations. Until that happens, the glittering metal is likely to
continue to languish.
-Farzan
Ghadially
No comments:
Post a Comment