Gold makes a tempting hedge in troubled times.
With uncertainty over Greek debt, turmoil in Ukraine and rising volatility in equity markets, it is little wonder that investors are again asking whether to add to their holdings of the world's oldest safe haven asset.
Our view is that it remains the wrong time to load up on the yellow metal as returns over a 12-month period will likely be negative.
Moreover, apart from holding gold, investors can secure more reliable protection against uncertainty from a diversified portfolio that includes less liquid assets like hedge funds or real estate.
The bulls would argue that the case for a rising gold price is in place.
For a start, the yellow metal has lost about a third of its value in US dollar terms since 2011. The fall came after the Federal Reserve's quantitative easing started to wind down and the runaway inflation that some gold enthusiasts had expected failed to materialise.
Other threats have emerged to replace inflation. Most notably, the endless wrangling over Greek debt has caused some investors to fret about the threat of a euro zone disintegration.
Meanwhile, in an era of ultra-low interest rates, the fact that gold offers no income seems less of a drawback. As of mid-February, around 16 per cent of the world's government bonds offer negative rates.
Finally, supplies of new gold are starting to slow. At current rates of production, gold mine supply is on track to be largely exhausted in almost 20 years. And as gold becomes hard to mine, production costs should continue to rise faster than US inflation.
There are also no known techniques to tap new gold deposits. So no "shale gold" is likely to send prices plummeting as we saw with crude over the last six months.
So why are we not more enthusiastic about the outlook for the gold price over the next 12 months?
The main headwind for gold is likely to come from the Federal Reserve. Since gold is denominated in dollars, changes in US real interest rates are the most important factor in determining the opportunity cost of holding it.
So if US policy rates rise to around 1 per cent by the end of the year, as we expect, gold prices will come under further pressure.
It is also seems unlikely that any of the tensions over Greece or the Ukraine will spill over into a global market slump.
Worrying as the Greek situation is, it still seems probable that a solution will be found that will keep the nation within the euro zone and the single currency intact.
And as long as the conflict in Ukraine doesn't escalate the ill effects should also be confined to the region.
And in any case, the single best defence against such local disturbance remains a globally diversified portfolio, which mitigates the impact of national or regional slumps.
What's more, stocks tend to recover faster from geopolitical upheavals than most investors assume. A UBS study of the six most prominent crises since 1974 found that global equities recovered their losses in anything from one to 190 days.
In addition, declining gold supplies have not yet started to bite. In fact, mine output hit a record 3,114 tonnes last year. Only if the gold price falls to around US$1,000 (S$1326) an ounce will production slide enough to support the price.
At this level, about 10 per cent of global mining companies are cash negative, giving them an incentive to cut supply to the market.
And for investors who dislike wild price moves, gold is a far from ideal choice. Indeed, the yellow metal's price typically moves in a much wider price range than global equities, bonds or the dollar.
Investors are right to consider all options to try to stabilise their portfolios in increasingly turbulent markets.
And some firmly believe that, no matter what, they will always be able to obtain credit against physical gold metal to pay their workers' wages or buy goods when others are panicking.
But unless such a financial apocalypse occurs, adding to gold holdings now is likely to produce negative returns.
Both writers are from UBS Wealth Management: Tan Min Lan is head of the Asia Pacific investment office and Christopher Swann director of chief investment office.
This article was first published on March 1, 2015.
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