Annus Horribilis for Gold

November 18, 2013 at 10:10

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This year may well be regarded as the annus horribilis for gold as its long-enjoyed rally came to an abrupt end. So far in 2013 the yellow metal, often referred to as the grandfather of commodities, has seen its worth plunge by more than 22 per cent to roughly $1,316 per ounce, leaving it 33 per cent below its September 2011 record high of $1,921.

In April this year investors were left reeling as gold endured its biggest sell-off in more than three decades, with some $1trn slashed from the value of reserves.

The severe falls have done little to bolster its investment appeal and even less for its reputation as a hedge against inflation.

The argument behind gold being a good hedge against inflation largely stems from the fact it is a tangible asset and during periods of high inflation, while the value of a bank note value may decline in real terms, a gold coin is more likely to hold its intrinsic worth.

However, the problem is that gold’s value still depends on how much someone is prepared to pay for it. And while this has fared well versus inflation longer term, in the short term the gold price can be very volatile. Notably the gold price hit an inflation-adjusted high of $2,350 in 1980 and hasn’t recovered since.

Simona Gambarini, research analyst at ETF Securities, points out that gold tends to have a significantly higher correlation to inflation than other asset classes and can therefore provide a strong hedge in periods of high inflation.

Martin Bamford, managing director of Informed Choice, says that for most investors, it is price inflation in the next five or 10 years that is the biggest concern.

“Gold prices can experience prolonged downturns, so unless you are prepared to hold gold for 20 years or longer, I would suggest there are better investment asset classes for helping to tackle price inflation,” he says.

Justin Modray, managing director at Candid Financial Advice, agrees: “It is certainly not an asset to consider for protecting against inflation for just a few years, unless you are expecting double-digit hyperinflation. Investors should always invest in gold on its merits, not because they think it might protect against inflation.”

Adrian Lowcock, senior investment manager at Hargreaves Lansdown says longer term gold has generally kept up with inflation but in recent history it has been very volatile.

“Over the past decade the gold price movements have outstripped inflation by some margin. In the short term gold might not track inflation but it continues to hold an appeal to cautious investors looking to protect their capital from volatile markets.”

Ms Gambarini says: “Should inflation rise above central bank targets, investors could find protection in gold, as its value in real terms has remained largely stable for decades.