I read an interesting note this morning from John Ventre, Portfolio Manager at Skandia Investment Group.
He was commenting on the fall in the price of gold to under $1,600 an ounce, coinciding with a more general fall in the value of risk assets.
To date this year, gold has become more closely correlated with equities; rising in value in the first two months of the year as equity markets have risen and falling since then as equities have fallen.
For investors who purchased gold as a ‘hedge’ against falling equity prices, this closer correlation will be disappointing.
John Ventre describes how “the crowded trade” could be causing this increased correlation between gold and risk assets.
Lots of investors own gold but the market for this asset remains very small. He points out that all of the gold in the world can be held in a 68x68x68ft cube.
Whilst there is no precise definition of the crowded trade, it generally describes a situation where a large number of investors share a similar sentiment and there is a heavy presence of short-term investors (‘speculators’ rather than ‘investors’). Those that invest in gold tend to be passionate about the investment, often lacking fundamental reasons for the allocation.
Circumstances like this are likely to amplify volatility and therefore risk.
As investors in risk assets (equities) suffer losses, the downward pressure on the price of gold is higher as they seek to retreat from this asset.
Ventre concluded that he continues to see gold as a bad investment, because it earns nothing and cannot grow. We share this view of gold as a bad investment.
Many investors are already indirectly exposed to gold through their equity holdings, with mining and other commodity stocks making up a big part of the largest companies in the UK.
Investing directly in gold can easily result in overexposure and greater risks than many investors are prepared to take. With this emerging correlation between equities and gold, perhaps some of the allure of this precious metal will begin to fade?
