Gold has sold off dramatically today on the back of comments from the Fed that it will taper – and eventually stop – its quantitative easing programme.
So far today, the price of the precious metal has fallen by 5.69 per cent, and at the time of writing is at $1,295. In September 2011, it hit a high of $1,920.
While investors in gold have seen returns of 306.35 per cent over 10 years, it has fallen off a cliff in recent times, as the graph shows.
Performance of gold year-to-date
Source: FE Analytics
However Hudson, global thematic strategist at Standard Life, says the pain for gold bugs is set to endure.
She says the reason gold has risen so high is because retail investors have much greater access to them via ETFs. However, with sentiment waning, she says a fall will come thick and fast because there is no intrinsic value in holding the precious metal.
"Because it is not driven by fundamentals, it’s hard to predict the supply dynamic element of the gold price," she said.
"On the passive side, there is no interest now because you can’t get any capital gain from it. I think this sell-off can be best described as the air being let out of the passive bubble."
"You can see headlines today that the SPDR Gold Shares index is down to its lowest level since 2009 because there are such large volumes coming out of the passive side," she added.
Hudson says that in addition to the vast outflows from gold ETFs, the physical demand for the asset is also waning.
"Reserve banks from Asia and the oil-producing countries have usually bought physical gold to show their strength," she explained. "However, as the oil price and Asian exporters are looking weak, those banks don’t have as much free cash to splash around on gold at the moment."
"Physical demand for jewellery, mobile phones and dentistry hasn’t changed – but that always remains the same."
Head of asset allocation at Fidelity Trevor Greetham believes that the optimism surrounding gold as a currency hedge was misplaced in the first place.
He too believes the bubble is in the process of bursting, and does not think the precious metal will hit the heights of 2011 for a long, long time.
"You can’t rule out geo-political issues supporting gold, and something like Syria is worth keeping an eye on," he said.
"However, with the US dollar as strong as it is and QE coming to an end, I don’t think you’re likely to see it hit $1,900 in our lifetime. It’s over."
Greetham says he currently has nothing in gold across his various multi-asset portfolios.
Neil Veitch, manager of the SVM Global Opportunities fund, agrees with both Greetham and Hudson and says the price of gold still has much further to fall.
"If you’re talking about QE resulting in a normalisation of inflated asset prices, not necessarily to absolute levels, but towards 2008 levels when gold was $800 – then things don’t look good," he said.
"Gold has little intrinsic value – it’s only worth what people are willing to pay for it, which is very dangerous when sentiment is this low."
Like Greetham, Hudson does not believe that gold is as an effective hedge against inflation as the majority of people like to make out.
"In the past we have never had QE to this extent and the history of gold as a hedge against inflation is predominantly based on what happened in the ‘70s and ‘80s, when there were two huge price shocks instigated by oil-supply contractions," he said.
"The first was the OPEC embargo in the ‘70s and then the 1980 Iranian revolution. Those created huge rallies in gold because higher prices in oil filtered down into CPI."
"That was at a time when we had just moved off the gold standard, central bank policy was entering a new direction and currencies were floating rather than fixed as they had been."
"Since then, we really haven’t had huge inflationary periods, although we had some mild inflation in the 1990s," he added.
David Jane says he has recently sold down the direct exposure to gold in his TM Darwin Multi-Asset fund, though he still holds a miniscule amount.
He says this is important as he feels investors need to offload any assets that have been propped up by the Fed’s added liquidity.
"Basically, gold has been dragged in with everything else as the market has had its bit between its teeth," he explained. "In this post-QE world, investors need to clear out all assets that have been propped up by the liquidity, because clearly in the short-term, it isn’t going to do well."
"That is why we sold our entire emerging market bond position last week and have trimmed our exposure to Asian property markets."
"We are maintaining a very small position in gold at the moment in the hope we can buy more later down the line. But at the moment, the wind is certainly blowing against gold," he added.
