Mohamed El-Erian
Mohamed El-Erian (Getty Images)
  • Mohamed El-Erian has warned that gold's status as a "must-have" asset has led to its "bipolar personality", as investors buy it as a hedge against both inflation and deflation.
  • Gold's rapid price rise "is yet another unintended result in a lengthening list of the exceptional involvement of central banks in the functioning of markets," he wrote in a Financial Times op-ed.
  • He said gold has collected an "unlikely cast of backers", in addition to those investors who have bought it through concern about factors such as the weaker dollar, or geopolitical shocks.  
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Notable economist Mohamed-El Erian said in a Financial Times op-ed that gold's evolution as a "must-have" asset has made it develop a "bipolar personality."

Gold's recent rally to record highs above $2,000 an ounce has been fueled both by investors looking to hedge against economic uncertainty and by those simply looking for a home for their cash. But its newfound reputation of having "something for everyone" could prove tricky to trade, he wrote.

He pointed out that a widening group of investors are buying gold, which is collecting an "unlikely cast of backers" in addition to those already worried about factors such as a weaker dollar and geopolitical shocks. 

Some believe investing in gold will protect them from the depreciation of the dollar, while others buy it on the grounds that it can be easily converted into cash in times of crisis. 

Gold is even attractive to those investors looking for a cushioned impact against two competing outcomes — deflation and inflation — which has led to the development of this bipolarity, El-Erian said. 

Gold acts as a hedge against inflation as it retains its value when the cost of living increases. Similarly when asset prices fall and central banks inject large amounts of cash into the financial system, which debases currencies, investors tend to look towards alternative assets, such as gold. 

The commodity's rapid price rise "is yet another unintended result in a lengthening list of the exceptional involvement of central banks in the functioning of markets," said El-Erian, who is the chief economic adviser at Allianz. 

Gold is up 26% year-to-date and stood at $1,950 an ounce on Friday. Prices surged to an all-time high above $2,000 before withdrawing this week, as investors diverted cash to risk assets, such as stocks.

"In the process, investors went from treating gold as a short-term momentum trade, to seeing it more as a legitimate standalone option in long-term portfolios," El-Erian wrote.

Treating a growing number of traditionally risky assets as low-risk "pushes prices higher, reinforcing the attitude change and lulling politicians and central bankers into believing that the market cycle has been conquered," he said. 

"But they are likely to prove as wrong as those who, before the 2008 financial crisis, erroneously believed they had vanquished the business cycle."

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