I don’t personally own much gold. In fact, I think it is safe to say I don’t actually own anything gold. Usually the mention of the word conjures in my mind iconic 80s children’s cartoon The Mysterious Cities of Gold whose catchy theme tune never failed to lure me and my brother in front of the TV when we were kids.
So news this week that precious metal’s price had plummeted dramatically did little to fray my nerves. But elsewhere, investors – and maybe the odd darts player – might not have been as sanguine as gold hit a low of $1,322, around 30% below its all-time September 2011 high of $1,923.7. This came after a sharp sell-off of more than 13% between last Friday and Monday – one of the biggest since gold began its bull run, representing a 20% drop since its peak value and taking gold officially into bear market territory.
Gold is held by many investors due to its defensive attributes, in that it offers inflation protection and a hedge against a declining US dollar. Given there is so much economic uncertainty present the asset class seems like a sure-fire bet for battening down the hatches, but given the recent drop this has come into question.
The key question for investors needs to be whether the correction, which has been on the cards for some time, is something fundamental which will halt the bull run in its tracks, or just a momentary blip which does not undermine the long-term case for holding the asset.
Most investors seem un-phased by the yellow metal’s drop, and I believe this indicates that it is actually a technically- driven minor glitch, as all asset classes undergo at some point, and investors will continue to hold gold as an important part of a diversified portfolio.
Kleinwort Bension CIO Mouhammed Choukeir said this week: “The history of financial markets is replete with unforeseen incidents suddenly affecting investor perception of risk and reward. In these events, gold may prove to be an important store of capital value, and indeed perhaps even a healthy source of return. As such, we like gold and continue to hold it in portfolios.”
But, in the current environment investors would do well to remember that well-used phrase: ‘there is no such thing as a risk-free asset’. The fact that gold has gone in recent years from being seen purely as a safe-haven to merely another risk asset and now trades more like other commodities should have investors viewing it as such and undertaking due diligence before allocating to it.
For the time being though, many investors it seems are holding on to gold and those immortal words of wisdom from everyone’s favourite new romantics, Spandau Ballet (sorry, I couldn’t resist). “Gold, always believe in your soul, you’ve got the power to know you’re indestructible, always believe in, because you are gold.”
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