Gold is set to remain strongly out of favour among retail investors for another year, according to research by Legg Mason Global Asset Management, but some experts argue that the defensive asset is set for strong gains given storm clouds on the horizon.
The yellow metal has been strongly out of favour over recent years after improving risk sentiment led investors to less defensive parts of the market. The gold price peaked at over $1,900 an ounce in 2011 during the height of the eurozone sovereign debt crisis but is currently trading at around the $1,180 mark.
This decline has come at a time when equity markets have surged, with several – including the FTSE 100 and the S&P 500 – reaching new record highs. While gold is down more than 10 per cent on a four-year view, the FTSE is up 36 per cent while the S&P 500 has advanced over 80 per cent.
Performance of gold vs indices over 4yrs
Source: FE Analytics
Legg Mason says gold has clearly become “unloved” by retail investors over recent years, with the average UK investor holding just 2 per cent of their portfolio in the precious metal at the start of 2015.
Furthermore, gold is unlikely to return to favour any time soon. A poll by the asset management house found that only 16 per cent of UK investors plan to lift their exposure to gold over the coming year.
This is below the global average of investors looking to buy more gold. Some 27 per cent of the 4,208 investors surveyed worldwide by Legg Mason said they will likely have a higher allocation to gold by the end of the year.
UK investors remain resolutely more favourable to other assets than gold. Equities remain the preferred option with 29 per cent planning on upping exposure, despite the record or near-record valuations being seen in many parts of the world.
Meanwhile, 22 per cent think they will be buying more bonds this year, even though some fund commentators are warning of a potential bubble in this asset class, while 17 per cent are allocating towards property.
Cautious investors are even opting to hold more cash than gold, with 25 per cent expecting to lift weightings here over the coming months.
Adam Gent, head of UK retail sales at Legg Mason Global Asset Management, said: “Gold has had a torrid time of it over the last two years, with investors more confident about the global economy and less in need of a safe haven that is typically viewed as an inflation hedge.”
“The strengthening US dollar, pledges by governments to support growth, and soaring equity markets have all worked against the precious metal.”
“The world has moved on from the global financial crisis when gold was in its ascendency, and barring an unforeseen shock to markets it seems unlikely it will be pushing back towards previous highs in 2015. Instead, we believe 2015 may be similar to last year, with a hunt for yield supporting asset prices across equity and fixed income markets.”
However, some asset allocators are warning that both the stock and bond markets are heading into a period of difficulty, especially after the strong performance seen over recent months.
Last week, iBoss investment director Chris Metcalfe (pictured) told FE Trustnet that he is focusing on downside protection as he expects a major correction to strike equities in the not-to-distant future.
“The market keeps going up without any apparent justification, but long-only managers always come up with expressions such as finding pockets of value – that concerns us because when there are only pockets left, it means the rest of the value has gone,” he said.
In addition, not all market experts think that gold’s tough times are set to continue over the rest of the year.
Macroeconomic forecasting consultancy Capital Economics expects the price of the yellow metal will reach $1,400 an ounce by the end of 2015.
One of the current reasons for a negative outlook on gold is the strength of the dollar, especially if increases in US interest rates prompt even more strength in the greenback. The analyst believes this concern may be overrated.
Performance of dollar vs sterling over 1yr
Source: FE Analytics
But Capital Economics head of commodities research Julian Jessop said: “Much analysis of the prospects for the gold price starts and finishes with the outlook for US monetary policy and the dollar, as if nothing else were remotely important. This seems to us to be an overly narrow view of a price determined in global markets by a wide range of demand and supply drivers.”
Jessop concedes that early tightening by the Federal Reserve is the “biggest single threat to the gold price” in 2015, while the fact that the commodity is priced in dollars means movements in the currency could exert some downward pressure.
However, he adds that other more favourable factors are likely to dominate the gold price over the course of the year.
The group says an escalation of the crisis in Greece is one such factor that could boost the price of gold as investors seek safe havens. Greece was told at a weekend meeting in Latvia that it will not benefit from any more aid until it agrees to an economic reform plan that the Eurogroup of eurozone finance ministers finds acceptable.
The country needs a further tranche of bailout aid if it is to meet its debt repayments and pay its domestic wages and pension bills. The impasse between Greece and the Eurogroup has heightened fears that it will default on its debt or even leave the eurozone.
Meanwhile, Capital Economics highlights a recovery in gold demand from Chinese and Indian households as being another support for prices. This trend was evident in 2014, as the World Gold Council noted in its full-year report.
“It was a standout year for Indian jewellery, despite government restrictions on gold imports, reinforcing the nation’s affinity with gold,” said Marcus Grubb, the council’s managing director for investment strategy.
“Meanwhile Chinese gold demand returned to those last seen in 2011/2012 as consumers and investors took time to digest the substantial volumes accumulated in 2013.”
Even a strengthening dollar and higher rates might not cause too many problems for the gold price, according to Capital Economics.
Jessop said: “Suppose, for example, that the dollar strengthens further because the Fed raises rates more aggressively than currently anticipated.”
“This combination might be expected to be particularly damaging for gold, because higher US rates would increase the opportunity cost of holding an asset which pays no income. But what if the prices of other assets – including US equities and bonds – fell even more sharply? Gold could then still benefit from a revival of safe-haven demand.”