Gold was an amazing investment back in 2010-2011. Those were hard times for all major economies in the world, when words like quantitative easing and bailouts became part of our regular expressions. It was hard to trust institutions, especially after they accumulate trillions of debt or, even worse, decide to swap toxic assets for healthy bonds. As a matter of fact, even bonds were riskier back then. Risk was everywhere.
Because of this, most investors, including myself, put their attention on gold. Considering the low return on equities, the high volatility in 2011 and the expected inflation, there were few options available. Portfolios needed to have a secure component. As somebody wrote back then: "You buy gold when you know that anything can happen anytime. When people, firms and institutions cannot be trusted. Then you know that a crisis is imminent and that you should put everything you have in gold, lock yourself up with a rifle and wait for the end of the world".
But does gold continue to be a sound investment now that most analysts conclude that 2013 will be an amazing year for equities and that the IMF predicts a 3.5% global growth rate?
A quick look at the price of gold (proxy: Nymex gold futures) for the period 2011-2013 suggests the opposite. Despite some ups, we cannot deny the fact that there is a declining trend in gold prices, especially after October 2012.
This motivated us to analyze the role that gold could play in your portfolio for 2013. We concluded that gold is not a good investment for this year due to the following reasons:
1) First of all, the price of gold was "too high" back in 2011.
By "too high" we mean that the deviation between the price of gold futures and the value that fundamentals dictated was abnormal. This was caused by fear of sovereign crisis, worse-than-expected inflation and the absence of sound investment alternatives.
2) There is a well-known inverse correlation between U.S. data improvements and gold price.
The better the U.S. performs as an economy, the lower gold prices get. There may not be a causal relation, though. Improving U.S. macroeconomic data has contributed to the recent decline in the price of gold. Thus, if you have, like me, a bullish view on the markets for this year, do not rely on gold except for hedging purposes.
3) Gold price sensitivity to risk in the eurozone may be decreasing.
As a Goldman Sachs research note suggests:
Despite resurgence in Euro area risk aversion and disappointing US economic data, gold prices are unchanged over the past month, highlighting how conviction in holding gold is quickly waning. With our economists expecting few ramifications from Cyprus and that the recent US slowdown will not derail the faster recovery they forecast in 2H13, we believe a sharp rebound in gold prices is unlikely.
4) Due to macroeconomic improvements, real negative interest rates could end this year.
This will reduce the advantages of using gold as an inflation-hedge. Furthermore, macroeconomic improvements are not occurring only the U.S. economy. The Japanese economy has had an excellent first quarter and the "Chinese economic growth slowdown" fear has vanished.
5) Investor sentiment towards gold continues weakening.
Rising equity prices to record highs in the US and Japan contribute to this. As a result, ETF holdings dipped over the last month to 84.0 million t oz from 84.6 million t oz.
Due to the reasons mentioned above, we agree with using gold in portfolios only for hedging purposes, but not as a main ROI driver.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.