When it comes to gold, investors' confidence is wearing thinner than the plating on cheap catalogue-order jewellery. Professional and private investors who had money in the metal are rapidly pulling out, and given that the price of gold has tumbled 25 per cent in recent months, it's hardly surprising.
The market has seen a slight recovery since the start of July, but does this represent a glimmer of hope if you've got a sinking feeling about gold? The answer is not clear, but if it's in your portfolio you'll be eager to know what other gold investors are doing - and why.
All good bull markets need a correction and the gold market is no different, according to Nicholas Brooks, head of research and investment strategy at ETF Securities. After a 12-year run the gold price was well overdue a major correction, and he says this is now taking place, albeit at a much higher velocity than its increase.
But there are a pile of factors that most analysts believe mean gold's future won't be so sparkly. In recent weeks markets have become fixated on concerns the US Federal Reserve will reduce quantitative easing (QE) if the economy improves, as the Federal Reserve expects. If markets believe money printing will slow, the argument for holding a physical store of value is not as strong.
And then there's the inverse correlation between the US dollar and gold prices to consider. Gold is priced in dollars, which means a strong dollar makes it less affordable to the rest of the world, reducing demand. The largest market for physical gold is India, where it is traditionally purchased for the wedding season, Recently though, the dollar has strengthened and the Indian government has been hiking import taxes on gold.
Dramatically widening yields on bonds in recent weeks also makes the opportunity cost of holding a non-income generating asset much weightier. The Gold Investor Report now says every major indicator it follows on gold has turned negative, confirming this metal is entering a bear market.
The evidence suggests a rather bleak outlook for gold but no one can really be certain.
What the exchange traded commodities (ETCs) are doing
ETC investors have been selling hard out of gold in recent months and ETFS Gold Bullion Securities (GBS) and Source Physical Gold (SGLD) each lost over £50m in the last week alone. Deutsche Bank Monthly data shows European gold ETCs made redemptions of £1.2bn in June (equivalent to around 45 tonnes) and £5bn so far in 2013 (equivalent to 190 metric tonnes).
What wealth managers are doing
Many wealth managers won't put their clients' money into gold while even bullish ones are trimming their clients' allocation. Many of them think equities or fixed income are much safer bets. Jason Hollands, director of business development at Bestinvest, says unlike an investment in a company, a bar of gold doesn't do anything to generate a profit. Because it has no yield it makes it hard to compare to other assets and this makes it prone to the uncertainties of complete speculation. Bestinvest has no allocation to the metal in its recommended portfolios.
Private bank Coutts says gold still has a place in a well diversified portfolio but it has been cautiously reducing exposure to it in many of its portfolios, favouring equities instead.
What the fund managers are doing
Back in April when the gold market turbulence kicked off with an almighty drop, we asked the managers of some of our Top 100 Funds with heavy gold weightings how the news would affect their portfolios. Sentiments ranged from a minor pull out through to a slight allocation increase to "get in cheap."
The most bullish noises came from Personal Assets Trust (PNL), managed by Sebastian Lyon at Troy Asset Management. It's an investment trust that has been very successful at limiting downside risk – an ability that earned it a place in our Top 100 Funds.
At the end of April, executive director Robin Angus told us the fund had ramped up gold exposure by 1 per cent in the days after the price crash, bringing the total allocation up to 13 per cent. "We want to take advantage of this situation," he said, adding there was potential for an even higher allocation if things continued.
But the latest data from the fund shows a different story. The fund's allocation to gold had dropped to 10.4 per cent at the end of June - a notable 2.6 per cent reduction - showing even the die-hard gold investors have been going easy on gold. Since then the price has had a modest recovery and he's re-allocated an extra 0.5 per cent "on weakness," but the fund is still holding significantly less gold than it was a few months ago.
What should you do?
Don't let following the herd be the only reason you dump gold from your portfolio. The value of gold is very hard to measure because ultimately, it is a speculative investment. A glance at the 30-year history of gold pricing will also help you put the events of recent months into perspective. Yes, the turbulence has been dramatic but the price is still relatively high. As a small part of a long-term portfolio it has historically done a good job of preserving capital and diversification from equities and bonds, and for this reason, Adam Laird, head of passive investment at Hargreaves Lansdown, says it still has a small place (less than 10 per cent) in many investors' portfolios, so if you're in for a long-term play now might be a good time to get in cheap.
A sterner warning goes out to private investors who are making speculative short-term plays on gold. The gold funds in our IC Top 100 Funds were the worst performers of the lot over the last year. BlackRock Gold & General (GB0005852396) fared the worst with a 41.59 per cent loss, showing how easy it is to get your fingers burnt on a short term play.
Analysts at FundExpert reckon your best bet for investing in gold is drip-feeding into Smith & Williamson Global Gold & Resources (GB00B04PXP62), also an IC Top 100 Fund. They say it's smaller and more agile than BlackRock Gold & General, and therefore a better option.
Read our last update on Smith & Williamson Global Gold & Resources
