Gold has fallen out of favour with investors over recent years after it had been the go-to holding for asset allocators in the period before and immediately after the financial crisis.
According to FE Analytics, gold has still returned 233.66 per cent over 10 years, which is close to 130 percentage points greater than the FTSE All Share’s gain over that time. However, as the graph below shows, it has fallen considerably over the last four years and is down 34 per cent since its peak in September 2011.
Performance of indices over 10yrs
Source: FE Analytics
A combination of growing optimism, a lack of inflation and the fact it doesn’t yield anything has pushed the price of the precious metal down to its current level of $1,198 and Stanojevic, mining analyst at the FTSE 250 wealth manager, says it will only continue to fall over the coming 12 months.
“Our preferred model is looking at real interest rates and we believe that the main cause of the rout in mid-2013 was lower inflation expectations,” Stanojevic said.
“Given our house view of low inflation expectations and very modest increases in nominal interest rates, our best guess is that gold continues falling in absolute terms. Extrapolating trends since the second half of 2013, we get to a 2015 year end estimate of $1,080.”
There are certainly fewer “gold-bulls” than there were prior to 2011, but certain investors continue to hold the yellow metal, despite its losses, as a hedge against future inflation and as a form of protection against potential doomsday scenarios.
High profile managers such as Trojan’s Sebastian Lyon, Investec’s Alastair Mundy and the team at Ruffer have all held gold over recent years and that decision has actually paid-off for them year-to-date.
Factors such as overselling at the back end of 2013 and wobbles in global equity markets meant the gold price spiked in January, gaining 14 per cent in the first three months of the year. Though the price has generally traded downwards since then, it is still up 5.18 per cent in 2014 compared to a 2.46 per cent loss from the UK equity market.
Performance of indices in 2014
Source: FE Analytics
However, like Stanojevic, Whitechurch’s Ben Willis told FE Trustnet earlier this week that the gold price will continue to fall next year.
He said that, along with government bonds, gold was the asset class that he is avoiding at all costs going into 2015.
“It’s actually given you a positive return this year, but we just don’t like it. People have traditionally used gold as a dollar-hedge and as a hedge against inflation. However, inflation is not an issue and the dollar is expected to strengthen plus it doesn’t yield anything,” Willis (pictured) said.
He added: “I’d rather hold cash to be honest.”
Julian Jessop, head of commodities research at Capital Economics, is far more positive on the gold price as he thinks it will rise as a result of the most talked about financial issue so far this December – the falling oil price.
“The conventional wisdom is that lower oil prices will add to the downward pressure on the prices of other commodities, many of which have indeed weakened,” Jessop said.
“But while this may continue to hold true for other energy prices and some agriculturals, we expect the boost to global economic activity to mean that cheaper oil turns out to be a net positive for the prices of industrial metals and for gold.”
The slowdown in China and the rise in shale gas in the US has meant there has been significant oversupply of oil and, along with the fact that OPEC has refused to step in to cut supply the market, the price of Brent crude oil has fallen to just $63 a barrel.
According to FE Analytics, the S&P GSCI Brent Crude Spot index is down 40 per cent so far in 2014 and this has had serious ramifications for certain equity markets, such as Russia, which is down a hefty 45 per cent since the start of the year.
Performance of indices in 2014
Source: FE Analytics
Jessop says that as the fall in the oil price is due to oversupply, rather than a “generalised weakness in demand”, he thinks other commodities – such as gold – will start to decouple. He therefore expects the price of the precious metal to rise around 8 per cent over the coming year.
“The upshot is that cheaper oil should support a rebound in the prices of industrial metals as global economic activity picks up,” Jessop said.
“What’s more, China and India are, of course, the two largest markets for gold. While inflation will be lower as a result of the fall in oil prices, global monetary policy is also likely to be looser for longer. We therefore continue to expect the price of copper to recover to at least $7,200 per tonne by end-2015 – from around $6,375 today – and gold to $1,300 per ounce – from $1,198 – helped rather than hindered by the lower oil price.”
