At a time when gold prices have been in retreat, ending what
had been a decade-long ascent, private bank Kleinwort Benson is cutting gold
exposure and adding holdings of dollars instead.

Although it has recovered slightly of late – gold fetched
around $1,387 per ounce at 12 noon in London
today – the price slipped in April, and is now some way from the record of
$1,921 achieved in September, 2011.

“We have held gold in portfolios for a number of years on
account of its defensive characteristics in times of financial stress and
because its sensitivity to inflation is better than most other asset classes.
However, with momentum now clearly negative on gold and with key technical
support broken at $1,500, the commodity looks to be an increasingly expensive
form of insurance, Mouhammed Choukeir, chief investment officer at the firm,
said in a note.

“Moreover, we are keenly aware of gold’s volatile history. The
gold price began 1979 at little more than $200. 
By January 1980 gold had hit an all-time high of $850 but then the
bubble burst. Three months later, gold was trading below $500. Gold kept
falling for almost two decades before bottoming out at c. $250 in 1999, just as
Gordon Brown, then [UK] Chancellor of the Exchequer, sold approximately half of
the UK’s gold reserves at an average price of around $275 between 1999 - 2002 –
a period that has become known as the `Brown Bottom’,” he said.  

“We will re-evaluate gold’s defensive and diversification
attributes once positive momentum is re-established. In the meantime, we are
selling gold and increasing our allocation to the US dollar - a safe haven
currency which has positive momentum,” he continued.

The bank said it continues to seek assets likely to offer
portfolio protection in the event of another downturn in financial markets.

“The US dollar has strong defensive characteristics in
periods of market stress.  Equity markets
are at or close to all time highs in many regions but there are signs of
investor complacency.  Moreover, a number
of potential risk events loom on the horizon – market driven (QE removal),
geopolitical (regional conflicts) and structural (poor growth and high debt).
History shows that risk events can hit markets with staggering speed. The US
dollar has historically acted as an important risk absorber in such events,” he
added.