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[LONDON] Investors seeking alternative assets are moving on from gold, whose failure to perform when its price was expected to rise and recent volatility as demonstrated by Monday's price plunge are prompting them to seek returns and protection elsewhere.
While the market's bedrock of jewellery buyers and central banks has largely stayed intact, the wider investment universe long courted by banks and gold bugs is now once-bitten, twice shy.
Gold prices, becalmed since February after two years of losses, fell to their lowest in five years on Monday as heavy fund liquidation in Asian hours pushed prices down through key chart levels, triggering a wave of stop-loss selling.
At its Monday low, it had erased half the gains from a 12-year bull rally that ran from 1999 to a record high near US$2,000 an ounce in September 2011.
The slide was reminiscent of gold's dramatic retreat in the second quarter of 2013, when prices fell nearly US$200 in just two days in April, and another 11 per cent in June.
Since then, gold has largely underperformed even in the face of seemingly positive news. When concerns over Greece's financial stability arose in the first half of 2010, gold rallied 13 per cent. This year, as the prospect of Greece exiting the eurozone altogether hit markets, gold hardly moved.
"There is an argument that gold hasn't done a great job recently of protecting against financial market risks, and the US dollar has done a much better job," Investec Asset Management portfolio manager George Cheveley said.
"With the recovery in the US economy, this has led to a view that the dollar as a safe haven has re-emerged" at the expense of gold.
Data released last week showed hedge funds and money managers sharply reduced their expectation that gold contract prices on the US Comex market would rise, while holdings of the largest gold-backed exchange-traded fund fell to their lowest on Monday since September 2008.
Gold's recent retreat notwithstanding, in terms of its relative value to other assets, the metal is still looking overvalued.
"If you look at how gold looks compared to oil or copper, or how it looks compared to US housing, for instance, none of these measures look particularly attractive for gold," Barings'director of asset allocation research, Christopher Mahon, said. "So not only do you have an environment that doesn't work for gold - in other words, a fairly normal economic recovery - but the value isn't there. It's still relatively expensive compared to where it was in 2007, and it performs badly on days when you'd expect it to do well. None of it really adds up."
Potentially positive factors for gold have been outweighed this year by the prospect of the first US interest rate hike in nearly a decade.
Ultra-low rates helped push gold to record highs, but a rise in rates would make it less attractive to hold non-yielding bullion, while boosting the dollar.
"We're still in an environment where people are focusing on US interest rates," Mitsui Precious Metals analyst David Jollie said. "There is definitely a search for yield, and commodities are just not in favour. That will limit the number of people who will come in." Where once gold played a pivotal role, it now must compete for investors like any other asset.
Gold historically was an integral part of the financial system, with the 'gold standard' pegging the value of a given currency to a set quantity of gold.
The standard was steadily abandoned throughout the last century, and as European central banks sold their reserves throughout the 1990s, gold drifted towards 20-year lows.
The market turned around in 1999 after the central banks agreed to cap their sales, before surging during the financial crisis that kicked off in 2007.
Prices jumped 30 per cent that year, and averaged annual gains of 15 per cent for the next five years. Gold attracted huge volumes of investment, which fund managers say saturated the market.
Gold's performance over the last five years has shown that it can sometimes fail to perform as either the steady store of value it proved to be in the 1990s, or as the appreciating asset it was in the 2000s.
"Up until three years ago, gold as an investment asset came up in every client meeting," Ashok Shah, investment director at London & Capital, said. "Now it only comes up with very long-term seasoned clients."
"A lot of clients have stopped doing long-term planning," he added. "That has changed in favour of more illiquid investment ideas, typically private equity, real estate, in terms of farmland or commercial real estate. Gold has reduced its relevance even in long-term planning for a lot of people."