Data from FE Analytics shows the gold spot price has fallen 26.43 per cent since January, considerably more than the second-worst year since 1973, which was 1997, when the metal fell 19.62 per cent.
Performance of gold spot price in 2013
Source: FE Analytics
However, Adrian Ash, head of research at BullionVault, says the metal’s long-term relative performance to other asset classes over the years shows that it has carried out its role as portfolio insurance.
“The FTSE versus gold tends to be pretty polarised: gold is an insurance policy, you didn’t need insurance this year,” he said. “However, you don’t want to cancel your insurance policy just yet.”
BullionVault’s figures (you can find the whole table here) show that gold has suffered in the last two years as shares have outperformed: a pattern that is repeated through the entire duration of the study.
Source: BullionVault
Gold was the best performer in 2005, 2007, 2008 and 2010, however, and second-best in 2006, 2009 and 2011, coinciding with poor periods for risk assets.
“After a year as bad as this, does diversification suggest gold will rebound immediately? That doesn’t seem to work, it’s not that obvious,” Ash said.
“It does suggest you should be exposed to a broad range of asset classes, even though you might not see a reason to hold a certain asset at this point in time.”
Taken as a whole, the period shows decent returns for the metal, largely driven by a 370 per cent appreciation between the start of 2005 and the market peak in 2011.
Performance of gold since 1999
Source: FE Analytics
“Gold has actually for a non-yielding asset over the 40 years since the end of the Bretton Woods system done pretty well overall,” Ash said.
“The pound sterling has become weaker and gold has performed pretty well compared with most assets over the long haul.”
“The research demonstrates how well it has done over the last decade. The annual average over the last 40 years is second only to equities: gold has made 11 per cent a year compared with 15.4 per cent for equities.”
The past year has been tough for two main reasons, Ash suggests.
“You have had a double-whammy effect: gold has gone lower but the pound has fallen against the dollar, which has also had an effect.”
One of the factors driving gold lower has been bulk selling by institutional investors, who believe that the decade-long bull market in the precious metal is coming to an end.
Up to a third of the money in gold ETFs has been sold, he says, the vast majority by institutions.
Ash points out that retail investors haven’t shown that same tendency to sell their precious metals.
“If you look at the [gold] ETFs which are predominantly managed money, if you compare them with silver ETFs which have done worse, they have proved themselves to be remarkably sticky because you have a lot of retail money in there.”
This has been backed up by an increase in bearishness on gold futures. Futures are exchange traded contracts that offer investors the chance to bet on the future price of gold.
Ash says that there has been a significant change in the expectations shown by the market. Whereas from 2009 to 2012 there was a strong net bullishness, this has been reducing markedly.
“It’s not quite short overall, but not as long as it was for many years,” he said.
One of the other factors weighing on gold is a belief that the price has to fall after stratospheric gains in recent years: this is behind many of the institutional moves against the metal, he says.
“Things don’t just go up year after year for 12 years,” he said. “There will be a lot of second-guessing about what happens to the gold price because of the last decade or more.”
The analyst says that many wealth managers and institutions believe it makes sense to bet against gold on a 10-year view.
While this may make sense, the continuing allocation by retail investors to the metal is justified by its performance in times that equities in particular have done poorly. It also has a decent record of protecting against inflation, Ash says.
Many people who bought gold during its boom years saw it as a hedge against inflation which they expected to follow upon the heels of quantitative easing programmes.
However, that inflation hasn’t come, although a number of managers and analysts suggest next year could see that change.
It is this sort of consideration that means investors should consider holding the metal among a diversified portfolio, Ash says.
“I think QE was designed to deal with the deflation threat that was identified, but now there’s reason to say that central banks aren’t as worried about deflation, it opens the door for people to worry about inflation,” he said.
