Gold has long been the precious metal of choice for the financial world. Once a bedrock of the entire global monetary system, gold has acted as a safe-haven asset in times of crisis – a rock-solid investment that would never lose its "intrinsic" value.
That idea is now being turned on its head. The price of gold has been falling steadily of late, and some German fund managers are so convinced it won’t recover that they are banishing the precious metal from their portfolios.
“We see gold as a volatile and risky form of investment without intrinsic value," Maximilian Uleer, fund manager at Germany's Sal. Oppenheim, told Handelsblatt. “We don’t expect a price recovery even in the medium term."
Sal. Oppenheim, a subsidiary of Deutsche Bank, Germany's largest bank, is among a number of banks in Germany that have been offloading gold. Hamburg-based private bank Donner & Reuschel is another that has said farewell to the precious metal.
The price of a "fine ounce," or 31.1 grams, fell Monday below $1,090, a five-year low, and has fallen almost nine percent since January. In July, it recorded its biggest fall in almost two years following news that the Chinese central bank, one of the world’s top gold holders, has been stockpiling its reserves of gold at a slower pace than previously thought.
Large German asset managers share the new-found skepticism.
“Gold has lost its hedging function,” said Stefan Kreuzkamp, chief investment officer for Europe at Deutsche Asset & Wealth Management, a subsidiary of Germany’s Deutsche Bank.
The trouble is that gold no longer seems to work as a safe haven. The gold price used to move in the opposite direction to investments that had risks attached to them. That’s no longer the case, Mr. Kreuzkamp said. The markets no longer distinguish between investments that carry risks and those that are risk-free.
As a result, when German sovereign bond prices and share prices fell earlier this year, the price of gold followed suit. In addition, the gold price has become more volatile than share prices, said Mr. Kreuzkamp, adding that gold has a further disadvantage: It doesn’t yield a regular return.
Gold is and will remain a central component of our portfolio — and an insurance against the known and unknown risks of the financial system. Philipp Vorndran, Capital Market Strategist
Strategists said there’s no prospect of improvement. If the U.S. Federal Reserve hikes interest rates this year as expected, the so-called opportunity cost of holding gold will rise, meaning that gold will become less attractive compared with bonds whose coupons will increase. And with global economic growth set to remain low, experts don’t expect any rise in demand for gold that could boost its price.
Central banks too are likely to keep their gold reserves steady rather than increasing them.
“It looks as if gold is in a downturn that won’t end anytime soon,” said Kristina Hooper, a strategist at Allianz GI, the asset management subsidiary of German insurer Allianz. Michael Müller, a fund manager at Union Investment, described the outlook as “muted.”
The gold price drop may even accelerate. Analysts at U.S. bank Morgan Stanley warned that it could fall as low as $800 per fine ounce. They said it was more likely that the price would stabilize at $1,050, but if U.S. interest rates rise, Chinese stock markets continue to fall and central banks keep lowering their gold reserves, the price could fall below $1,000.
Goldman Sachs, ABN Amro and Société Générale all predict that gold will fall below $1000 by the end of the year.
Not everyone buys into the sad gold story. If economic uncertainty picks up and investors start worrying about inflation, gold could come back in fashion.
“Gold is a kind of joker,” said Ms. Hooper of Allianz GI.
That’s why some gold fans like Cologne-based fund manager Flossbach von Storch are keeping the faith.
"Our gold holdings haven’t changed recently," said capital market strategist Philipp Vorndran. “Gold is and will remain a central component of our portfolio — and an insurance against the known and unknown risks of the financial system.”
But the price of gold hasn’t responded to those risks recently. To be sure, in 2012 it benefited from fears that the European single currency might collapse. But since then, it hasn’t responded much to bad news. When the Ukraine crisis escalated last year, gold showed only a brief reaction.
“The gold price hasn’t been reacting to geopolitical crises for years,” said Mr. Uleer at Sal. Oppenheim.
That’s because such crises are no longer perceived as a threat to investments. Only the prospect of an extreme outbreak of inflation or a collapse of the euro zone would radically improve the outlook for gold. But most money managers simply don’t expect such scenarios to happen.
This dramatic shift in how gold is perceived means investors in gold need to think seriously about the long-term.
It wouldn't be the first time: Mr. Uleer recalled that in 1980, after the global gold standard was dropped and the gold price hit its then-peak of $850 — never since surpassed in inflation-adjusted terms — it halved again in just two years. And while it did recover, it took almost 20 years for gold to resume its upward trend – that's much too long for most investors.