Investors who have been relying on the notion that if the price of gold is down, the stock market will be up, were sorely disappointed yesterday. The old adage that investing in shares is a bet on future prosperity while buying gold is a bet on future disaster and that the two are inversely correlated – travelling in opposite directions – is now looking decidedly rusty.
Metal prices were in free fall following a stumble on Friday and the FTSE 100 lost 40 points yesterday.
The cause of the gold sell-off was laid at the door of the world’s biggest commodity consumer, China. Its GDP, coming in at 0.3 per cent lower than expected at 7.7 per cent was the motive for getting out of gold, while fears of central banks tightening monetary policy to “rein in” inflation didn’t help either.
Miners – who make up more than 10 per cent of the entire FTSE 100 – were the worst performers of the day with gold miners the most tarnished. Mexico’s Fresnillo fell a massive 15 per cent – or 193p – to 1,080p – taking the wooden spoon. The Russian precious metals miner Polymetal ended the day down 113p on 746p and African-focused Randgold Resources was blemished by a 413p fall to 4,545p.
Shaun Port, the chief investment officer at online fund manager Nutmeg.com, said: “Gold no longer trades as a safe-haven asset… Now gold moves in a similar fashion to equities – it is “positively correlated”. When global stock markets fell abruptly in April/May 2012 and again in October/November, gold prices also fell. As such, gold no longer trades as a useful insurance policy against a major economic or market shock.”
Analysts at CMC Markets think the yellow metal could fall as far as the $1,310 level– last seen in 2011. The FTSE 100 declined 40.79 points to 6,343.6.
Across the rest of the blue chips there were still some stocks in positive territory despite the wide sell-off.
Shareholders in GlaxoSmithKline were breathing a sigh of relief on news that the US Food and Drug Administration thinks its drug, Breo, a treatment for lung disease and other illnesses linked with breathing difficulties, is broadly safe and consistent with similar drugs. The shares recovered 61p to 1,630.5p.
Another riser on the blue chips was United Utilities, the UK’s largest listed water company. Reports of bid speculation in the weekend papers helped pump up further rumours about a foreign infrastructure fund taking a look.
The company appointed Goldman Sachs, reportedly to “strengthen defences” against the bid, but Marc Kimsey at Accendo Markets reckons there could be more to the appointment. He said: “As recently as January, Goldman Sachs was said to be representing a consortium interested in making a bid. The weekend press stated the latest addition to United Utilities’ team of advisers is to ‘strengthen defences’ against a takeover. Or perhaps they’ve been appointed to facilitate?”
Investors flowed in to United Utilities and the shares trickled up 18p to 739p. Severn Trent also got a boost from the takeover talk, adding 27p to 1,733p.
The weekend papers flushed out a statement from CVC Capital Partners on its interest in online bookie, Betfair.
In a statement, CVC, the private-equity fund that owns Formula One, admitted it has had “preliminary discussions with Richard Koch, Antony Ball and partners regarding options in respect of Betfair” and investors placed their bets as shares added 82.5p to 782p.
In contrast, there was a profit warning from mid-cap betting firm Ladbrokes. Cold weather put a freeze on punters for the bookies at traditionally successful events such as Cheltenham. The bookmaker lost 16.6p to 190.3p.
Ted Baker was in fashion after scribblers at Goldman Sachs raised its target price to 1,600p from 1,300p. They think there is a “large opportunity for Ted Baker in US department stores, where it is currently significantly underpenetrated”. Ted Baker stumbled down 36p to 1,255p.
Aim-listed Scottish football club Rangers International said it has commissioned an independent examination and report in response to media reports relating to allegations made by Craig Whyte, the previous owner of Rangers, about its chief executive, Charles Green, and commercial director, Imran Ahmad. The pair strenuously deny any wrongdoing but the shares dribbled down 3.5p to 62p.
Buy: Tullow Oil
Snap up Tullow Oil, analysts at Jefferies insist. The broker’s Brendan Warn and his oil team think that the explorer “offers exploration-driven upside” because it has balanced its “project development exposure” with its operational cashflow. They give the shares, which are currently 1,097p, a 1,800p price target and think that “rich, near-term newsflow” will spout from its wells across French Guiana, Kenya, Ghana and Uganda.
Get shot of Fidessa, Peel Hunt advises. The broker says the financial IT business’ “core equity markets have yet to stabilise” and that growth is “offset by headwinds”. “Any recovery is unlikely to have a material positive impact this year,” it adds. The company’s shares are 1,776p with a 1,600p target.
Hold: Rentokil Initial
Panmure Gordon has raised its share price target on Rentokil from 85p a pop to 97p based on its sum of the parts analysis, but otherwise says now “is not a good entry point for new investors” in the Queen’s ratcatcher. The broker adds that shares, presently at 97.3p, “look overvalued, with disposals required to unlock future value”.