Gold holdings trimmed as bubble fear grows

Some asset allocators are growing cautious on gold as the price continues to rise, analysis from Standard & Poor’s (S&P) reveals.

Gold has been widely held as a hedge against inflation or uncertain markets, but some asset allocators are trimming exposure and predicting that the metal could be the next bubble.

Gold prices have trended upwards over the past decade, dipping only in 2007-08 before reaching fresh highs this year. The metal briefly hit $1,250 an ounce in June and is climbing towards that level again after a dip last month. (article continues below)

Several analysts, including Goldman Sachs, have said the price could rally to $1,300 over the rest of 2010, buoyed by low interest rates and the prospect of further quantitative easing in America.

Among asset allocators more positive on gold, Laurence Boyle, who runs the WDB Assetmaster products, has maintained his position in the metal as a hedge against a double-dip recession.

Timothy Youngman, the manager of the Ruffer European fund, took a near-10% gold bullion position recently, for protection from market volatility.

But S&P highlights Barings, LGT, Union Investment and Legal & General as groups that have grown less bullish on the commodity in recent months.

Andrew Cole, the manager of Barings Multi Asset fund, has invested in gold since 2007 but says the reasons for its appreciation have changed. “More recently the rise in gold has been spurred by increasing nervousness about the willingness of central banks in the West to maintain the purchasing power of their currencies,” he says.

“Our purchases of gold in 2007 were driven by the desire to find a genuine risk-diversifier, but more recently it has not fulfilled that objective. Its performance has been correlated with that of other risk assets and this has prompted us to reduce exposure.”

Asset allocators at Legal & General say gold appreciation has been supported by an environment of low interest rates and ample liquidity and if these factors faded and demand subsided, weakness could follow.

DailyFX, an online trading service, has suggested that the gold bubble is set to burst at the first sign of weakness.

Ilya Spivak, a currency strategist at DailyFX, says the rally has become self-fulfilling with gold’s appeal dependent almost entirely upon continued gains.