The SPDR Gold Shares (GLD) is nearly half the size it was at the end of 2012, slipping below $40 billion in assets after ranking—again—among the day’s top ETF redemptions Thursday. GLD is not alone in a growing investor aversion to the precious metal that until recently was the safe haven of choice for many.
Some, such as State Street Global Advisors’ Dave Mazza , have pointed out that physical demand for gold is picking up more quickly than investment demand for gold through ETFs. Mazza has also made the case that gold’s weakening correlation to other assets has made GLD an even better portfolio diversifier than before.
But most seem to agree that a strengthening U.S. dollar and a lack of inflation are hurting the yellow metal’s allure more than diversification is helping.
In fact, as Adrian Ash, from BullionVault, pointed out in an article published on HardAssetsInvestor, the main reason investors buy gold is to combat inflation, or “the erosion of money’s purchasing power,” more so than diversification.
The continued outflow of assets from GLD now totaling $19.5 billion year-to-date, and from funds like the iShares Gold Trust (IAU)—which has also seen its share of outflows, now totaling $1.77 billion year-to-date—also reflects a risk-on sentiment among investors based on views that the U.S. economy is stabilizing.
That sentiment has helped send U.S. stock prices to record-high territory, and fueled massive inflows into U.S. equities ETFs. Meanwhile, sentiment about gold is bruised and gold values are slumping, now off some 25 percent year-to-date as investor shun the so-called safe-haven asset. Both GLD and IAU have bled nearly 24 percent of value since the beginning of the year.
In a macro sense, Federal Reserve Chairman Ben Bernanke’s latest comments suggesting that the Fed’s easy-money policies and low interest rates won’t end as soon as some had feared haven’t done much to help gold. If nothing else, the Fed has made it clear that its policies will remain data-driven and largely accommodative for a long time to come, yet gold remains in the doldrums.
Time To Buy?
Even at current lows compared with the nearly $2,000-an-ounce level seen not too long ago, not too many are calling gold a good buying opportunity just yet.
Dennis Gartman, who refuses to consider gold a safe haven partly due to its volatility, has recently said in an interview with HardAssetsInvestor’s Sumit Roy that gold prices could still slide to as low as $900 an ounce from the $1,284 level it’s currently trading at. That’s to say investors in gold could still be poised for sizable losses ahead.
iShares’ Global Chief Investment Strategist Russ Koesterich is another voice echoing concerns about gold’s prospects.
“While I still believe that investor portfolios should contain a strategic allocation to gold, changing monetary conditions provide for a less accommodating environment,” Koesterich said in a commentary posted on iShares’ website. “All else being equal, gold returns are likely to be lower and more volatile than has been the case over the past four or five years.”
Koesterich doesn’t see the current market environment as a good one for buying gold. In fact, he is suggesting investors consider trimming their exposure to the yellow metal, citing declining demand, a change in sentiment about gold, a strengthening dollar and the head wind the gold market faces from rising real interest rates in years.
“An environment of rising real interest rates, like the one we’re in today, should create a less supportive environment for gold prices,” Koesterich said. “This is because real interest rates, which equal nominal interest rates minus inflation, are essentially the cost of holding gold, an asset that generates no interest income.”
“When real interest rate are rising, as they are today primarily thanks to an increase in nominal rates, investors holding gold are forgoing more and more interest income,” he added.
Of course inflation could change all of that, but Fed policies have yet to generate inflationary pressures. From a global economy perspective, unless some major crisis materializes, gold’s prospects shouldn’t change much either, he noted.
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