What's common between gold, Apple and Facebook

With the global economy set to improve and the US Fed hinting at another bond buying scheme, gold has lost favour with investing circles. However, what’s interesting is that a similar plunge in IT stocks like Facebook and Apple has corresponded with the gold plunge.

From 1 October 2012 to mid-May 2013, Apple shares dropped 60 percent, whereas the safe-haven Gold Trust ETF fell 23 percent. While the two are not supposed to move in lock-step, they have actually dropped in sync and bottomed too. Moreover, in the post-crisis era, both gold and Apple outperformed and proved to be valuable alternatives against the general financial meltdown. But now that the global economy is off the pits, the two are losing their special value.

Mohamed El-Erian, chief executive at giant bond fund Pimco, in a guest column published in the Financial Times attributes this synchronisation to valuations getting completely divorced from intrinsic attributes of the product.

Rising gold prices generated higher returns but the valuations no longer reflected the fundamentals of physical demand and supply, explains El-Erain, thus rendering it vulnerable to any change in conventional wisdom or a ‘stable disequilibrium.’

According to Erian, the same phenomenon caused Apple to collapse after it roared past $700 a share, while Facebook’s associated hype convinced investors to oversubscribe at its IPO a year ago.

So what is the lesson to be learned?

“Firm and repeated central-bank commitment to asset purchases has done more than push a growing number of investors to add portfolio risk at ever more elevated prices. It has also repressed market volatility, lowered correlations and given the illusion of stability,” says El-Erian.