Gold's Fall from Grace is Arguably Puzzling

PERSPECTIVES: In such uncertain times, one would think gold would be regarded as a safe haven, says Aberdeen's Mike Turner

Aberdeen Asset Management 16 April, 2013 | 12:09PM
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This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Mike Turner, Head of Global Strategy & Asset Allocation at Aberdeen Asset Management, comments on the recent slump in the price of gold.

Gold’s fall from grace is arguably puzzling. Developed market countries remain mired by huge levels of debt and anaemic growth. Even in the relatively buoyant emerging markets the rate of economic expansion has slowed. In such uncertain times, one would think gold would be regarded as a safe haven.

Yet its double-digit decline in recent days would suggest otherwise.

Speculation that Cyprus may set a trend among Eurozone central banks by selling off gold reserves to plug deficits may have weighed on sentiment. This combined with concerns over inflation easing – gold is a natural hedge - can be seen as possible factors behind the sell-off. But perhaps more important is the fact that the yellow metal has morphed in recent years, from being seen purely as a safe haven to merely another risk asset and now trades more like other commodities.

Yet investors should not forget about the attractions of gold. No one really knows the long-term consequences of the huge monetary stimulus packages implemented to rescue the global economy from the clutches of deflation/depression. Inflation remains a risk, however distant, and gold remains one of the best insurance policies against this threat. Equally if deflation prevails this brings into question the soundness of fiat money, in particular currencies such as the Euro which seems much less stable at the moment and gold represents the best store of value against that prospect. Central banks, particularly in emerging markets, are only just beginning to increase their exposure to gold as they look to diversify away from US treasuries and the US dollar.

Undoubtedly though the recent massive price decline will have shaken the nerves of the most ardent gold bugs, and it may take some time for investor sentiment towards the yellow metal to recover. We continue to believe that gold can play an important role within a diversified portfolio and we are likely to allocate again to the asset class. But for the time being we are comfortable with our current mix of equities, fixed income and other alternatives.

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Aberdeen Asset Management  is a global investment management group, managing assets for both institutional and retail clients from offices around the world.