At a time when gold is in a bear market amid record outflows from investor holdings, bullion remains relevant in portfolios as inflation may accelerate, the U.S. dollar weaken and global economic growth stall, according to Franklin Templeton Investments.
“As part of an overall diversified portfolio, gold does serve a role because some of these things are still real risks as we look forward over the next 12 months,” said Steve Land, lead portfolio manager at the firm’s Franklin Gold and Precious Metals Fund, which has over $1.34 billion in assets under management. He spoke by phone from San Mateo, California.
Gold has slumped 18 percent this year and entered a bear market in April as investors sold the metal in favor of riskier assets, spurred by expectations that stimulus programs would be scaled back as the global economy recovers. Holdings in exchange-traded products shrank 17 percent this year, after climbing every year since the first product was listed in 2003, as U.S. equity indexes reached an all-time high.
Bullion is reversing a 12-year bull run even as central banks around the world including the U.S. Federal Reserve print unprecedented amounts of money to strengthen their economies. Analysts from Goldman Sachs Group Inc. to Credit Suisse Group AG and Deutsche Bank AG called for the metal to peak this year.
Gold for immediate delivery was at $1,377.21 an ounce at 11:41 a.m. in Singapore. Prices have retreated 28 percent from the record $1,921.15 in 2011.
“When you’re at your best health, you’re feeling good, that’s the time when your insurance policies are actually the cheapest,” said Land. “It’s been very volatile and painful on the way down but as a whole, a small allocation to gold as part of an overall portfolio still serves its purpose. Once you find out you’re sick it’s going to cost a lot more, it’s going to be a lot more expensive.”
Gold fell to the lowest in more than two years last month, unleashing a purchasing frenzy among coin and jewelry buyers from the U.S. to China and India, the largest consumers. Bullion’s premium on the Shanghai Gold Exchange, China’s largest cash market, remained above $20 for a fourth day yesterday, according to HSBC Securities (USA) Inc.
“I’ve been very encouraged by the very significant uptick in demand from coins and jewelry,” said Land. “People still believe in gold, they still want it. The next time around when investment interest comes back to the sector, it’s going to be that much harder to price that gold out of people’s hands and recreate some of those bars to fill the ETF vaults with.”
Paul Singer’s Elliott Management Corp. and John Paulson’s Paulson & Co. are among investors sticking with their bullish view even after they lost money on the metal. Paulson has said gold is the best protection against currency debasement and inflation, while Elliott said it remains the best store of value and will rebound as governments haven’t found a solution to their debt.