Is gold still a good investment?

Overall gold demand dropped by 13 per cent in the first quarter this year

Gold has always been considered a safe haven for investments. When the markets crumbled in the past, investors ran to it for shelter. However, when this asset of last resort suddenly loses its lustre, investors change their tack.

After prices of the precious metal plummeted in recent months, investors ditched their gold-backed ETF holdings and shifted their money to other investment vehicles. Gold exchange traded funds (ETFs) are not bars and coins, but they are units representing the physical metal that are traded like a stock.

The latest World Gold Council report showed that overall gold demand dropped by 13 per cent in the first quarter this year, as investors adopted a short-term, more speculative approach and started redeeming their ETFs.

ETF investors across the globe sold an equivalent of 176.9 tonnes or about $9.3 billion worth of the precious metal in the first quarter, representing a 7 per cent decline in total gold ETF holdings over the period.

“A proportion of more opportunistic and event-driven investors reacted to the first quarter price drop by selling their ETF holdings,” the World Gold Council said in its report. “This reaction may have been driven by several factors; profit-taking on long-held positions; loss-limitation on more recently initiated positions; a switch to other investment channels,” the report said.

The price of gold has been declining in recent months, with falls registering more than $300 last month alone. Financial experts said the significant decline prompted investors to speculate that the commodity’s glory days are over. The resurgence of equities as an attractive investment alternative is also contributing to the shift.

“Investors have become concerned by the falls in the price of gold. The dramatic and rapid fall has led many investors to believe that the bull run for gold is over, and at the same time they have seen equities have one of their best runs in over five years,” James Thomas, regional director at Acuma Independent Financial Advice, told Gulf News.

“As is often the case, many investors have crystallised large losses in gold, and then invested into equities to try and get onto their bull run in the hope of recouping their previous losses and benefit from the equity markets performance. There has been a realization that companies have actually been performing well, and have also been able to generate healthy dividend, and so therefore their stocks have risen accordingly.”

However, the World Gold Council argued that while the decline in ETF gold holdings during the first quarter is significant, it represents an equally small proportion of the overall stock of gold held by private investors. As of end-March, total ETF gold holdings account for just one per cent of the entire 175,000 above-ground stock of gold.

Thomas also pointed out that while gold has lost some of its lustre, the reasons that it was turned to as a safe haven are still largely valid. “There is also a risk that markets are still quite fragile, and could easily lose the gains that they have recently seen. All the more reason to build a well-diversified, balanced portfolio of assets,” he said.