INVESTORS are dumping holdings in gold funds at the fastest pace in two years in favour of equities, compounding a slump that has wiped $560 billion (R5.1 trillion) off the value of global central bank reserves.
Exchange-traded products linked to gold have slid $37.2bn this year as the metal reached a two-year low on Tuesday.
Gold funds suffered net outflows of $11.2bn this year to last Wednesday, the most since 2011, while global and US equity funds had net inflows of $21.25bn, EPFR Global said.
Central banks are among the biggest losers because they own 19 percent of all the gold mined, according to the World Gold Council in London.
After rallying for 12 consecutive years, the metal has tumbled 29 percent from its September 2011 record of $1 923.70 an ounce. Growing economies and corporate profits, along with slowing inflation, have boosted global equities by $2.28 trillion this year at the expense of the traditional store of value, Bloomberg data show.
“There’s a perception that risk has been lessened, and with that, investors are looking for assets that either generate income or have growth potential, neither of which gold has,” LPL Financial market strategist Anthony Valeri said.
Gold futures in New York have slumped 18 percent this year, the worst start since 1981, after a 9.3 percent drop on Monday that capped the biggest two-day decline since January 1980. The metal tumbled into a bear market on Friday, down more than 20 percent since the record close in August 2011.
Bullion has lost ground as the US recovery has gained momentum, the dollar has risen and the US Federal Reserve signalled it may scale back on stimulus, curbing demand for gold as a haven. Goldman Sachs said last week that the turn in the gold cycle was quickening and investors should sell the metal.
Bullion’s appeal as a hedge against inflation has been eroded partly by the slowing rise in consumer prices. The cost of living in the US fell 0.2 percent last month, the first drop in four months, as cheaper petrol and clothing kept consumer prices in check, US Labour Department data showed on Tuesday.
At the same time, the Standard & Poor’s 500 index has more than doubled from its 12-year low in 2009, helped by the Fed’s unprecedented bond purchases, record low interest rates and three consecutive years of profit growth.
“The equity trade is looking attractive because the fundamentals in the US economy continue to improve,” First Asset Investment Management senior vice-president John Stephenson said. “It’s been a great 12-year run, but there’s increasingly less reason to be in gold.
The metal, which typically does not pay interest or generate profits on its own, has traditionally become more popular when investors are concerned that values of other assets will be eroded by inflation.
“If you think about the intrinsic value of gold, there’s not a lot,” Guy Debelle, the assistant governor at Australia’s central bank, said. “Gold often has a high price because people believe that other people believe that it’s worth a lot.”
Individual investors have added $19.5bn this year to unit trusts holding US equities, after removing $400bn in the previous four years, the Investment Company Institute said.
“Since the opportunity cost to hold gold was very high, people moved to the more remunerative assets like equities and cash,” Walter Hellwig at BB&T Wealth Management said.
But some investors remain bullish.
Billionaire John Paulson is sticking with his bet on higher prices. He started the year with about $9.5bn invested across his hedge funds, of which about 85 percent is invested in gold share classes. This year’s slump to Monday has erased $1.5bn of his wealth, on paper.
Paulson is sticking to the thesis that the metal is the best hedge against inflation and currency debasement as countries pump money into their economies.
BlackRock fund manager Catherine Raw concurred, saying in a television interview: “The outlook for gold for us is really positive in the long term. The probability of inflation over the next five years is higher, not lower, than it was last year. Other things, such as cash losing money, the Cyprus event, savings being targeted, means people are looking for alternatives.”
BlackRock is the top holder in the iShares Gold Trust, with 5.9 percent, and the fifth-largest in the SPDR Gold Trust, an exchange traded fund backed by the metal. Paulson is the top investor in the SPDR fund at 5.7 percent, official US filings show. The fund’s holdings fell to 1 145.92 tons on Tuesday, the lowest since April 23, 2010.
Global exchange traded product holdings are down 9.7 percent this year. Assets reached a record 2 632.5 tons in December last year. The value fell on Monday to $103.24bn.
Gold’s slump has eroded the value of reserves held by central banks and the International Monetary Fund to about $1.4 trillion from a record $1.96 trillion, based on World Gold Council data. The US and Germany are the biggest holders, with the metal accounting for more than 70 percent of their reserves. – Bloomberg
