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Gold still glistens but let the buyer beware, says Stonehage


Investors should consider reducing the levels of gold in their portfolios to neutral as the metal may already be overvalued, according to the Stonehage Group, a multi-family office offering wealth management and advisory services to ultra-high-net-worth families.

The price of gold has risen dramatically in recent years as investors have sought to protect themselves against both inflation and the insolvency of debt burdened governments.

While solvency risks remain, investors may be paying extremely high prices to insure against inflation which, to date, has failed to meaningfully manifest in developed economies.

Stonehage Investment Partners (SIP), the group’s investment advisory arm, which manages GBP2.4bn in wealthy family assets, believes that gold prices may see significant downside should actual inflation not begin to surface in due course.
Ronnie Armist, executive director at Stonehage, says: “The price of gold is currently dependent to a large extent on investment demand, which puts it in a precarious position. Should investors fall out of love with it, the growing stockpiles of gold held in vaults and ETFs may hit the market, placing downward pressure on prices.
“Gold has also shown a positive correlation with equities at times of stress this year, which means investors should not be relying on it as protective ballast in volatile markets.”
Investment demand is taking up an increasing proportion of the gold market as “fabrication demand” – or the use of gold in jewellery and industrial applications – has decreased steadily since 20001. In addition, current profit margins for gold miners are significantly higher the historical average of 75 per cent. Reversion to the mean of this measure could see gold prices fall to around USD1,120 per ounce, or circa 30 per cent lower than current levels.
Notwithstanding the downside risks to the gold price, Stonehage recognises several catalysts for higher gold prices; not least is the on-going European debt crisis. Should investors covet gold to protect against a Eurozone break up, there is still the potential for significant appreciation of the metal. This could be heightened by the relatively small size of the gold market: if all global investors increase gold allocations by just one per cent, the price of the metal could triple.
Yet portfolios holding gold do not always outperform in crisis periods: the sell-off in equities in the spring of this year correlated with lower gold prices as investors reduced holdings to meet margin calls.
For UK centric investors, an optimal allocation to gold between 1987 and 2011 would have been between 2.5 per cent and 4.7 per cent in a diversified portfolio with a conservative to moderate mandate. This is in line with Stonehage’s long term strategic allocation of three per cent for its exemplar portfolio.

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