He said the precious metal’s role as a risk diversifier is questionable because of its lack of relationship with equities.
Reynolds’ claim came after the World Gold Council (WGC) released a report arguing that a distinct allocation to gold within a portfolio including alternative assets could enhance performance and reduce risk for investors.
The report analysed the effect gold has when included in a portfolio of mainstream and alternative assets and, according to the WGC, demonstrates portfolios with an allocation to gold of between 3.3% and 7.5% show higher risk adjusted returns while consistently lowering value at risk.
But Reynolds said gold should not be viewed as a panacea of risk management because "you never know what it’s going to do".
He split 12 years from 1999 to 2011 into two periods and looked at the movements of the MSCI World Index with Income and the gold commodities price.
In both periods (December 1999 to December 2005, and December 2005 to October 2011) the correlation between the performances of the asset classes was virtually zero.
"Over the past 10 years equities have generally fared pretty poorly," Reynolds said, "If we were ever going to see a truly negative correlation between these two assets it would have been then."
What’s more, when a genuine financial meltdown is predicted, the price of gold falls alongside the performance of all asset classes.
No protection in ‘real’ crises
Reynolds said this was due to credit availability (or lack of it) and liquidity issues and used the Lehman Brothers’ collapse to illustrate his point.
On 14 March 2008 the gold price peaked at approximately $1002 per ounce and by 11 September it had fallen to $746 per ounce.
A partial recovery happened between 11 September and 9 October in the initial post-Lehman panic and it reached $913, but as the credit crisis took hold in the aftermath of the bankruptcy, which was filed on 15 September, it tumbled back down to $721 per ounce.
Reynolds said a similar pattern could be seen August and September of this year when the latest bout of risk aversion took hold.
"The one moment you really want your more secure asset to fight for you and be a diversifier it doesn’t, so what is the point in holding it?"
Dollar is true safe haven
In comparison, the dollar has come up trumps in the past and shown itself to be a genuine safe haven.
Before the collapse of Lehman Brothers, on 22 April 2008, the euro hit a high of 1.599 against the dollar and by 28 October it fell to a low of 1.2500 on the dollar. This shows the dollar strengthened considerably post-Lehman’s crash.
Courtiers’ house view is that gold is at bubble valuations, but Reynolds admitted it was a bubble that could avoid bursting for some time yet.
The reason behind this is the emotional pull gold has for many investors, which he argued has no real foundation.
"Gold bulls will tell you that 50% of gold demand now comes from jewellery sales, but that used to be 80%. In the second quarter of this year 480 tonnes of demand was from jewellery and 405 tonnes was scrap supply.
"Compare this to Q2 2005 when jewellery accounted for 776 tonnes and scrap for 202 tonnes. Back then there was genuine jewellery demand, which drove up the price, now it is investment demand driving up the price.
"It is almost like a Ponzi scheme which demands more and more investors coming in to keep the price up there," he concluded.
