Investors not buying gold bounce despite Ukraine tension

Metal is back in the spotlight after a strong month, but strategists say long-term comeback not in sight

Mar 3, 2014 @ 11:19 am

By Mason Braswell

gold, stocks, bonds, commodities, ukraine, volatility
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The Ukraine national flag, right, flies beside a Russian, center, and a European Union flag in Kiev, Ukraine. (Bloomberg News)

Gold's big jump and rising market volatility have put the metal back in the spotlight, but advisers and strategists are skeptical of a major comeback this year.

“I get questions all the time from advisers and clients about what they should be doing with gold,” said Mary Ann Bartels, chief investment officer for Bank of America Corp.'s wealth units. “It's still a very topical subject.”

After the price of gold fell more than 28% last year, the metal has made its way back into the headlines, especially over the past month as investors have seen uncertainty rising in the U.S. and emerging equity markets. As of Monday, gold was trading around $1,350 an ounce, up from its 52-week low of around $1,180, according to Bloomberg data. The SPDR Gold Trust ETF was up almost 10% in February and has gotten an additional boost from unrest in Ukraine.

But for the most part, market strategists are not convinced it is anything that will last and retail investors are still wary.

“Gold typically does well with geopolitical events grabbing headlines. There's uncertainty associated with these events and events in Ukraine warrant those headlines right now,” said Quincy Krosby, a market strategist at Prudential Financial Inc. “But it could change very quickly.”

Ms. Bartels said she expected gold to jump at the beginning of the year because many clients had sold off their positions at the end of 2013 to book losses they could then use to pare down taxes. But despite the short-term rally, she still maintains her outlook that gold will be down to $1,100 by the end of the year.

“Gold was an underperforming asset class last year, but we came into 2014 oversold,” she said. “It was certainly a candidate for a tax-loss bounce, and we have seen some technical moves that would allow it to go a little higher.”

This year, however, rising interest rates and strong performance in the equity markets would temper recent gains, she said.

“With interest rates projected to rise, we think that's a negative for gold,” she said. “If you overlay equity markets with gold, as equity outperforms, gold underperforms.”

Retail investors, too, are more comfortable keeping their money in other asset classes. Many gold investors were burned in the past year after moving too late into what they thought of as a safe asset, according to Jonathan Blau, president and chief executive of Fusion Family Wealth.

“Gold had a parabolic rise,” he said. “Some people who hadn't ridden it from the beginning and entered maybe in the final period of the rise and got burned.”

Even with recent volatility, many of Mr. Blau's clients are still focused on the equity market, and he has been re-balancing them by placing them in fixed income or other alternatives, he said.

Ms. Krosby said the higher inflows likely came from short-term traders more than long-term retail investors.

“As the price rises, you get some going in with the momentum,” she said. “They're not going in because they believe in the fundamentals of the price of gold, but they're coming in because the price is coming up.”

While Ms. Krosby and others acknowledged that a worsening of events in Ukraine could alter the investment outlook, the expectation was that it was temporary.

Doug Coté, chief investment officer at ING Investment Management Co., said that while he was fielding more questions about gold from advisers and clients, he wasn't his changing his outlook.

“I would just counsel retail investors that a geopolitical event can be temporary,” he said. “And buying during a crisis tends to be too late.”

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