Gold investors who pared their positions several months ago should hang tight after last week's rout, despite signs that the precious metal has lost its luster as a safe-haven asset, say U.S. wealth managers.
Money managers polled by Reuters said they had already pulled back their clients' exposure to gold in September when its price hit a record high of $1,920 an ounce and then tanked by over $300.
Most are now limiting their exposure to no more than 5 percent of their portfolio after the second-biggest sell-off since the 2008 financial crisis.
Bullion's 9 percent plunge to $1,560 an ounce was all the more shocking because the slump was so much more pronounced than either the stock market's losses or the dollar's gains, both correlations that have strengthened lately.
"The change in correlation with the stock market is very significant because it is saying this is an unstable asset class. It means the fundamental support of gold is pretty shaky," said David Kelly, chief market strategist at J.P. Morgan Asset Management.
"People should be very nervous if something changes that easily from a zebra to a leopard," Kelly said.
The advice from wealth managers carries more weight in the gold market than ever before as the rise of exchange-traded funds over the past five years opened up the one-time professionals-only market to everyday investors.
Thus far, most appear to be standing pat. Physical gold holdings of the world's nine biggest ETFs — a measure of outstanding investment — dipped by less than 350 million ounces or less than 0.5 percent from Dec. 9 to last Friday, according to data compiled by Reuters.
Many managers have been anxious over gold's outlook since August, when the rally first faltered and volatility spiked.
Steven Ayer, a managing director and partner at High Tower's Strata Wealth Management Group in Harrison, New York, said he reduced most of his clients' gold positions by 3 to 6 percent in August and September. Some clients even closed out their entire positions.
Ayer said his average gold portfolio weighting is now about 5 percent.
The recalibration is partly the result of changing attitudes toward gold. Instead of a safe haven, wealth managers and investment strategists see gold as vulnerable to the deepening debt crisis in the eurozone and increasing funding stress.
It's a stark departure from decades of popular wisdom that gold maintained value during jittery economic times.
"To the extent that the crisis in Europe has implications of global, and not just European, risk, that will drag gold down," said Paul Christopher, chief international investment strategist at Wells Fargo Advisors, the brokerage arm of Wells Fargo & Co.
Wells Fargo Advisers changed its recommendation on commodities to underweight on Nov. 15, down from neutral.
THE WAITING GAME
Still, some money managers see a buying opportunity if the price correction in gold deepens.
"(At) the bottom of this correction in gold ... there is going to be a tremendous opportunity to capitalize," said High Tower's Ayer.
Jeff Saut, chief investment officer at Raymond James, likes the long-term prospects of gold, despite the recent plunge.
"It is now going through a normal correction," said Saut, noting that every year since 2007, gold has seen double digit corrections at some point in each year. For example, between mid-March 2008 and early May 2008, the price of gold dropped more than 20 percent from peak to trough. It still ended up more than 5 percent for the year.
And, adjusted for inflation gold is still a long way off from its peak in 1980, argued David White, a financial adviser in Bloomfield Hills, Michigan.
Then, gold hit $850 an ounce — more than $2,300 in today's dollars — as oil prices drove inflation higher and geopolitical tensions prompted a safe-haven rush into the metal.
Even so, veteran trader Dennis Gartman — who closed out his bullion positions just before the collapse in prices — isn't ready to return to bullion yet. If prices break through last week's low of $1,560 an ounce early this week, he is bracing for "one more cascade," he said in his newsletter on Friday.
"For now, the sidelines still look wonderfully inviting," he said.
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