The observation that gold has been a disappointing investment of late should come as no surprise to anyone in the investment world. The fact that this has occurred in the context of developments that would normally push gold prices higher is notable. But the most consequential hypothesis of all is that gold might be losing its traditional role in a diversified investment portfolio.

To say gold has underwhelmed investors in the past couple of years is an understatement. It did not participate in the surge upwards in nearly all financial asset prices and it has not provided protection in the more recent downturn in risk markets.

Throughout this period, gold has not benefited from rock-bottom interest rates that compensated for one of its main disadvantages as a financial holding, namely, that gold holders do not earn any interest or dividend payments. It has also shown an unusual lack of sensitivity to geopolitical shocks, Greek-related concerns about the euro and the vast injection of liquidity by central banks.

Price decline

The performance of gold has been so dreary as to encourage a growing number of hedge funds to bet against the asset, notwithstanding its price decline of 8 per cent year to date (and 16 per cent over the past 12 months). Indeed, positioning reports point to large shorts.

Several reasons may be advanced to explain these historical anomalies. They suggest that while cyclical factors have played a role, the main drivers are much more structural and secular in nature.

First, investors have found more direct ways to express their views about the future, particularly in a world in which central banks have had such an important influence on asset prices, from the explosion in equity exchange traded funds globally to the deepening of interest rate and credit products.

Second, gold has become a lot less attractive to investors as a result of the lack of meaningful inflationary pressures. It has also suffered from the more general decline in interest in commodities among institutional and retail investors, due in part to slower global growth.

Third, gold faces the growing risk of lower demand from central banks, once deemed reliable core holders. Part of this is driven by the fall in holdings of international reserves by the emerging world, particularly as they try to cope with the impact of lower commodity prices.

Fourth, as historical correlations have broken down, the analytical case for investing in gold has been challenged. In particular, prices have failed to respond positively to some notable geopolitical shocks, eroding its attraction as a diversifier and risk mitigator.

Fifth, the main drivers of most asset prices – liquidity injection by central banks and deployment of some of the large corporate cash holdings via dividends, buybacks and M&A activity – have not spilled over in any meaningful way to gold; neither directly through reallocation of investor funds due to price movements, nor indirectly due to concerns that all this liquidity would fuel inflation.

Sixth, the size of the demand response induced by the lower prices – from jewellery and other physical uses – is too small to offset the erosion of investor interest. Finally, there is the price level argument. Before its recent lacklustre performance, the price had surged. Thus, it is the earlier price move that could be deemed unusual and excessive.

Assessing the cyclical versus secular/structural balance of these seven factors, it is hard not to conclude that gold may well be experiencing an erosion in its positioning as a core holding in diversified institutional and retail investment portfolios. The more this happens, the more enticing it will be for “fast money” to short the metal as a way of inducing even greater sales by disappointed core holders.

This situation is unlikely to change soon but not be terminal. A shift would probably require a broader normalisation of financial markets, including a diminution in the direct and indirect role of central banks in determining asset prices and their correlations. Until then, the glittering metal is likely to continue to languish. Mohamed El-Erian is chief economic adviser to Allianz and chairman of Barack Obama's Global Development Council. He is also the former chief executive and co-chief investment officer at global investment firm Pimco – Copyright The Financial Times Limited 2015