Investors return cautiously to gold after drubbing

LONDON (Reuters) - Negative interest rates, financial turmoil and a weaker dollar should be drawing investors into gold, the traditional “safe haven”. Some are indeed returning, but after a dismal few years for bullion, so far they are dipping in their toes at most.

There are good grounds for caution, and going decisively for gold may be a stretch too far if gains on global stock markets in the past two sessions mark a reversal of this year’s dive, rather than just a temporary blip.

Investors have fresh memories of being burnt. More than a decade of price rises melted away in April 2013 when gold suffered its biggest one-day drop in dollar terms of $125 an ounce. Prices fell 28 percent that year, posting the worst annual performance since 1981.

After that investors avoided substantial forays into gold, with the prospect of higher U.S. interest rates capping gains in an asset that offers no interest payments at all.

Things changed when stock markets began plunging in the New Year. Most money headed for the safety of cash or top-rated government bonds, but some also has gone into gold.

Despite a drop on Monday, the bullion price remains up 14 percent so far this year, and hit a year high of $1,260.60 last Thursday.

Behind this lie fears that central banks’ loose monetary policies can no longer help economic growth, and that the response from governments may end the era of ultra-low inflation.

“The move into gold has been driven by people questioning whether negative rates are working; they are damaging banks, their profitability and willingness to lend,” said Andrew Cole, Multi Asset Investment Manager at Pictet Asset Management.

“They are thinking the next step might be fiscal loosening, governments spending money created by central banks. That leads to the worry about the inflationary outcome.”

The idea is that gold would hold or increase its value were paper money to lose value through a return of inflation.

Renewed interest can be seen in the largest gold-backed exchange-traded fund (ETF), New York’s SPDR Gold Trust. Its holdings have jumped more than 11 percent to surpass 23 million ounces, worth $28 billion at current prices.


The European Central Bank, Bank of Japan, Swiss National Bank and Sweden’s Riksbank have all introduced negative interest rates to raise inflation to moderate levels.

Such policies, which penalize commercial banks for depositing money at the central bank rather than lending it into the wider economy, are hurting the lenders. European bank shares hit multi-year lows last week and, despite the modest recovery on Monday, fears remain of a financial crisis similar to 2008.

Throw in the chance that the U.S. Federal Reserve might have to reverse the rate increase it made in December, and investors could lose faith in the central banks’ ability to stimulate economic growth - and jump into gold, possibly over government debt as some euro zone bonds falter.

“For a long time people didn’t ask about gold, but now more people are asking. When you have concerns about the outlook of some sovereign bonds, gold is not a bad place to be,” said Stephen Jen, founder of SLJ Macro Partners.


Diversified commodities funds run by Schroders have been significantly overweight on gold since the end of last year, mostly in gold equities such as mining stocks.

James Luke, a fund manager at Schroders, acknowledged investors’ fading faith in the central banks although he said this had yet to bring major changes in physical holdings by exchange-traded funds.

“While there has been a shift into gold the amount of asset allocation has so far been minimal,” he said.

HSBC illustrates the caution.

“There is increasing demand for gold in an environment where interest rates are heading down into negative territory,” said Fredrik Nerbrand, global head of asset allocation at the Bank.

But he added: “If we are heading down into recessionary-type of territory then I’d rather sit in Treasuries.”

Between 2010 and 2012 HSBC Bank’s allocation to gold averaged 12 percent, a far cry from now: “On a strategic basis (it) is 1 percent; tactically we have nothing.” he added.


For a decade from 2001, gold investors ceased to worry about the lack of interest payments on gold as its value rose from $250 an ounce to a record just shy of $2,000 in 2011.

The slide from 2013 began when former Fed Chairman Ben Bernanke mentioned the possibility of reducing the U.S. central bank’s bond purchases under its quantitative easing policy, and markets started to think about higher U.S. rates.

Last summer’s Chinese stock market turbulence swept through many markets but failed to raise more than a ripple in gold, with nervous investors largely opting for cash.

The Fed eventually raised rates last December for the first time in nearly a decade, but expectations about the pace and magnitude of further increases have since been scaled back.

Markets are now looking at the possibility that the Fed will reverse the rise, weakening the dollar and boosting safe assets such as U.S. Treasuries, the Japanese yen and gold.

Capital Economics analyst Simona Gambarini accepted that gold has reverted to its traditional role but questioned how long the turmoil would last.

“It was actually quite positive that gold behaved like a safe haven again,” she said, but added she was not surprised by Monday’s drop in the bullion price as stocks calmed down.

“Gold is probably going to fall further if the situation improves in global equity markets. If the panic subsides, it is probably going to fall to $1,150.”

Additional reporting by Susan Fenton and Jan Harvey; Editing by Veronica Brown and David Stamp