Some fund managers consider pulling out of gold as price is too high

Written by Ray Clancy

Thursday, 05 August 2010 10:16

High gold prices are leading asset allocation fund managers to reconsider holdings but the commodity is still regarded as a safe haven asset.

Having used gold as a hedge against inflation or uncertain markets over the last couple of years, fund managers in the asset allocation sector are re-evaluating their holdings, according to Standard & Poor’s Fund Services in its latest update on asset allocation funds.

‘A number of asset allocation fund managers have long standing positions in gold,’ said S&P Fund Services lead analyst, Roberto Demartini.

Overall, gold is still seen by many as a safe haven. Boyle at WDB Assetmaster, for example, has retained his holding as he believes that gold could do well both in an inflationary scenario and in the case of a double dip recession.

However, with the price high, some managers have been reducing their holdings. ‘The Barings team feels that gold has not fulfilled that objective, as its performance has been highly correlated with that of other risk assets. This has led them to reduce exposure slightly,’ Demartini said.

Other fund managers who reduced their holdings include the team at LGT, who took some profits in gold miners despite remaining positive on the fundamentals.

Less confident on the asset’s future are the managers at Union Investment, who considered investing in gold but refrained on the view that the recent rise of the gold price is not backed by solid fundamentals.

The team at Legal & General also remains out of gold as they consider it could potentially be the next bubble. ‘The Legal & General team believes that its appreciation has been supported more by an environment of low interest rates and ample liquidity. If these factors disappeared and investor demand subsided, then gold could go through some weakness. They also pointed out that on some technical indicators it looks overbought,’ explained Demartini.

Looking ahead for the next six months, there is some divergence of opinion among fund managers. ‘On the one hand are the sceptics, such as the team at Newton, who remain cautious. They point to fragile confidence and expect volatility to stay high,’ he said.

On the other hand, the more upbeat view is characterised by the team at KAS (Deutsche Postbank) who are positive on the markets and expect a rebound after the summer. ‘They point to the fact that dividend yields are attractive and the reporting season underway has so far been positive, whereas bonds are expensive,’ Demartini added.