Volatile gold unnerves investors

Wealth managers are warning that cash is the only true safe haven amid the current market volatility, after the gold price suffered wild swings in recent days.

Investors have been piling into gold all year, pushing the price up to nearly $2,000 dollars an ounce at the start of September, as fears over the eurozone debt crisis and slower economic growth in the US led many to seek shelter from volatility.

But gold was a surprise victim of the market sell-off last week when investors around the world dumped both equities and commodities amid fears of a global economic slowdown.

The precious metal lost nearly 9 per cent of its value in one week – the biggest percentage fall since 1980. It recovered slightly this week, ending 3.4 per cent down at $1,620. But the falls led some wealth managers to question whether the metal should be viewed as the safest asset class to be in. “Those who believe gold to be a safe haven could be in for a very nasty shock,” warns Patrick Connolly at AWD Chase de Vere, the financial advisers. “Many people perceive gold to be a safe haven but, if you look back in time, you will see that the complete opposite is true.”

He points to the 65 per cent fall in the gold price in less than two and a half years, following its previous peak in 1980. It then took more than 28 years for the 1980 price level to be reached again.

“The price of gold has suffered from high levels of volatility, resulting in investors making or losing large amounts of money over some very short periods,” he warns.

Cazenove Capital sold out of gold last month, as it felt that valuations had risen too far. Marcus Brookes, head of multimanager funds at Cazenove Capital, believes the reason for the summer price rise had been market expectations of a further round of quantitative easing in the US – which failed to materialise.

“It became clear to us that there could be a short-term decline that could be quite powerful, so it would temporarily fail to act as a safe haven,” he explains.

However, Brookes says he plans to buy gold again – through the ETF Securities exchange traded fund – once the price falls further. “We’re prepared to wait – we think we’ll get a better opportunity $300 cheaper than here,” he says.

ETF Securities, which has attracted £72bn to its gold exchange traded funds, reports relatively large outflows in recent weeks, with around £340m exiting the funds in the past month and £52m withdrawn in the past week alone. But this week, following a rise in the price on Tuesday, inflows spiked to £176m in one day. Nicholas Brooks, head of research at ETF Securities, says there is nothing unusual about gold falling in value when the markets panic. He points to a similar initial sell-off in 2008 after the collapse of Lehman Brothers. But gold is one of the few asset classes that then swiftly bounces back in value, he says.

“Gold is like any other asset – it will be sold when investors are raising cash,” he says. “But, normally, gold rebounds following that deleveraging phase of a panic.”

In 2008, for example, the gold price ended up 6 per cent for the year in dollar terms – while nearly every other asset class had plummeted in value.

“That’s one of the appeals of gold: it is a very liquid asset that one can sell when one needs cash,” says Brooks. “It’s a good asset to have going into a crisis.”

Analysts at Bank of America Merrill Lynch said this week that they still expected the gold price to hit $2,000 an ounce in the next year, in spite of the recent spike in volatility, because of the continuing economic problems in the US and Europe.

Most wealth managers also believe that it is worth holding some gold, as an insurance against a complete catastrophe.

“Gold is a tail risk insurance – the chance of the tail risk is not high but it is uncomfortably higher than zero,” explains John Haynes, head of research at Investec Wealth & Investment.

“It is an asset to own in small size in the hope that it falls in price – since the rest of a diversified portfolio should be doing well in those circumstances.” Portfolios at Investec generally contain about 2 per cent in gold.

But, along with other wealth managers, Haynes says the best solution for those who cannot tolerate short-term volatility is simply to hold cash. “The best solution for most people most of the time is cash if you’re frightened,” he says.

Connolly agrees. “The only safe haven is cash,” he says – although he warns that, with interest rates so low, cash investors are losing money after inflation is taken into account.

Brookes says he raised the cash portion of his portfolios to 20 per cent at the start of the year – which was deeply unpopular with some clients. But he says that one advantage of moving into cash is being able to later move it into asset classes that have fallen in value. He is buying equities again, for example, after steep falls in stock markets.

“If you have the dry powder waiting and preserve a decent amount of your capital in the falls, you feel far more confident about buying,” he explains.

In general, wealth advisers recommend keeping allocations to gold relatively low – up to 5 per cent of a portfolio – and diversifying into a range of different asset classes, to reduce the chances of sharp falls across the board.