Why gold may be losing its lustre

If the past 30 years are any indication, gold does not constitute an attractive investment over the long term,' National Bank of Canada says

Virginia Galt

Globe and Mail Update Last updated on Monday, Sep. 28, 2009 06:40PM EDT

National Bank of Canada is revising its outlook for gold, following other forecasters who have questioned whether the metal's runup may be over.

Since 2005, National Bank economists have promoted gold as a commodity likely to improve the performance of investors' portfolios.

However, despite the recent rally that propelled the price of gold to new heights, National Bank economist Matthieu Arseneau said Monday that “it appears more and more clear to us that the time has come to revise our position.”

The weak U.S. dollar has been a major driver of this year's surge in the price of gold. However, the currency has recently been showing signs of stabilizing, and could be about to turn upward, National Bank chief economist Stéfane Marion said last week.

Following up with a research note Monday, Mr. Arseneau said “investors who dared place some of their eggs in gold in recent years have been nicely rewarded for what they did.

“However, the time has come now to revise their positions” as signs of a global economic recovery start to emerge, he said.

“Headwinds are building against the price of gold. Risk aversion is gradually returning to pre-crisis levels and inflation fears should abate,” Mr. Arseneau said in his report.

“If the past 30 years are any indication, gold does not constitute an attractive investment over the long term. Moreover, in times of economic recovery, the return on gold falls well short of the return on the stock market.”

Gold (GC-FT991.70-2.40-0.24%) edged down below $990 (U.S.) an ounce Monday as the U.S. dollar rose versus the euro, prompting a liquidation of long positions in the market after bullion failed to stay above $1,000 an ounce.

Mr. Arseneau noted that gold “has acquitted itself well as a safe haven by outperforming the S&P/500 over the course of the past two recessions.

“However, it is important not to hold on to this investment for too long: Historically, the return spread has swung far in favour of the stock market in the two years following a market trough.”