Is gold now a crowded trade?

Gold has now fallen below $1600 an ounce, coinciding with a general sell off in risk assets. So far this year, the metal strengthened for the first two months of the year, alongside risk assets and has weakened for the last two months of the year, also alongside risk assets. With this higher, unwanted, correlation investors may begin to question whether the metal can provide the portfolio hedge that they hope their investments in the metal can provide.

So why has the correlation gone up? I think this is an example of our old friend "the crowded trade" rearing its head. Very many investors now own the asset, even though the market is in fact incredibly small - all the Gold in the world can be moulded into 68x68x68ft cube. As investors - particularly levered ones like hedge funds - take losses in other parts of their portfolio, then selling pressure emerges across the board as investors pull their horns in.

I continue to think that Gold is a bad investment - it earns nothing and it cannot grow. For these reasons, I continue to avoid it in my portfolios.

By John Ventre, Portfolio Manager, Spectrum and multi asset funds, Skandia Investment Group