Gold - A Strategic Asset

Gold – A Strategic Asset

Gold benefits from diverse sources of demand:
- As an investment
- A reserve asset
- Jewellery
- Technology component
- It’s liquid
- No ones’ liability
- Carries no credit risk
- It is scarce
- Historically preserving its value over time

Gold enhances a portfolio in 4 key ways:
- Returns
- Diversification
- Liquidity
- Portfolio Performance

Extraordinary times and opportunities
2020 posed unprecedented challenges to investors as the first global pandemic in a century ravaged the world economically and socially.
COVID - 19 significantly increased uncertainty by compounding existing risks and creating new ones. The rollout of new vaccines at the end of last year fuelled optimism that the worst was over. Yet the pandemic and the ensuing policy response from governments will likely have unintended consequences for, and create structural changes to, asset allocation strategies.
Global central banks have effectively taken interest to 0, driving nearly all sovereign debt to negative real yields. With less opportunity for yield across fixed income assets – especially those of shorter duration or higher quality – investors will likely continue to shift exposure to riskier assets. This has pushed many global stock markets to extreme levels on numerous valuation metrics and importantly has also served to increase the risk profile of most investment portfolios.
Additionally, many countries have made it clear they will continue to enact sizeable fiscal policy measures to tackle the economic impact of COVID - 19, along with expanding budget deficits and balance sheets.
These actions – in combination with the current environment have made gold increasingly relevant as a strategic asset. Not only could investors benefit from gold’s role as a diversifier amid ballooning budget deficits, inflationary pressures, and potential market corrections from already high equity valuations, but they may also see additional support as gold consumption, will likely benefit from the nascent economic recovery, especially in emerging markets.

ESG considerations
Over recent years, investors have increasingly looked to integrate environmental, social and governance (ESG) considerations as part of their investment process. For example, 89% of European investors now take ESG factors into account when making investment decisions. This increased emphasis on ESG reflects increasing pressure for businesses to actively manage ESG risk. It also emphasises that good ESG performance could lead to better long-term financial performance. This shift towards a greater integration has important implications for gold, which needs to demonstrate that it is produced and sourced responsibly, as well as the role that gold can play in supporting ESG objectives within a portfolio.

The increased relevance of Gold
Institutional investors have embraced alternatives to traditional investments such as equities and bonds in pursuit of diversification and higher risk-adjusted returns. The share of non-traditional assets, such as hedge funds, private equity funds or commodities, among global pension funds increased from 7% in 1998 to 23% in 2019, this figure is 30% in the US.

Gold allocations have been recipients of this shift. Investors increasingly recognize gold as a mainstream investment, global investment demand has grown by an average of 15% per year since 2001 and gold price has increased almost seven-fold over the same period.

Gold performance has been strong in recent decades, supported by key structural changes such as:
- Monetary policy
- Central Bank demand
- Market risk
- Market access
- Emerging market growth

Gold has outperformed most broad-based portfolio components over the past 2 decades.
Gold has performed well over the past decade, despite the strong performance of risk assets.
Gold historically rallies in periods of high inflation, outperforming broad-based commodities.
The purchasing power of major currencies and commodities has significantly eroded relative to gold.
Gold prices have tracked the expansion of global money supply and outpaced T-bills over time.
Gold has been more negatively correlated with equities in extreme market selloffs than commodities and US treasuries.
Gold has consistently benefited from “flight-to-quality” inflows during periods of heightened risk.
Gold behaves and is used as a safe-haven in periods of systemic risk but also performs well in market recoveries.
Gold trades more than many other major financial assets and is liquid across key investment platforms.
Gold has been less volatile than many equity indices, alternatives and commodities because of its scale, liquidity and diverse sources of demand. Adding gold over the past decade would have increased risk-adjusted returns of a hypothetical US pension fund portfolio.

Conclusion
Perceptions of gold have changed substantially over the past 2 decades, reflecting increased wealth in the East and a growing worldwide appreciation of gold’s role within an institutional investment portfolio. Gold’s unique attributes as a scarce, highly liquid and un-correlated asset demonstrate that it can act as a diversifier over the long term. Gold’s position as an investment and a luxury good has allowed it to deliver average returns of nearly 11% over the past 50 years, comparable to equities and more than bonds and commodities. Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. But gold’s dual appeal as an investment and a consumer good means it can generate positive returns in good times too. This dynamic is likely to continue, reflecting ongoing political and economic uncertainty, persistently low interest rates and economic concerns surrounding equity and bond markets.

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