Gold and Investors in Australia in 2023

Gold and Investors in Australia in 2023.

Last year and so far in 2023, Gold, in Australian dollars (AUD), delivered positive returns and attracted attention. While global central banks bought a record level of gold in 2022, Australia’s sovereign wealth fund also added gold to its portfolio. 2023 may create headwinds for most assets as pressures of stagflation intensify. Gold has historically posted superior returns during periods of stagflation and also helps super funds achieve their “CPI+X%” objectives and enhance risk-adjusted returns.

Last year saw one of the biggest market storms in decades amid high inflation and hawkish central banks. While the MSCI World Index experienced its worst year since 2008, global bonds, proxied by the Bloomberg Barclay Global Aggregate Index, recorded their largest annual loss ever. Australian assets were not spared either. Both, local equities and fixed-income assets witnessed pullbacks but gold delivered positive returns (+6%, in AUD), mainly driven by factors including local currency weakness, geopolitical uncertainties, and inflationary concerns.

Gold’s defensive ability, among other qualities, has attracted institutional investors’ attention recently. In its recent position paper, the Future Fund, Australia’s sovereign wealth fund, announced the addition of gold to its portfolio. As mentioned in the paper, challenges such as high inflation levels and the weakened defensive nature of foreign currencies may have prompted its decision to buy gold.

In 2023, markets may be vulnerable to negative shocks, notably stagflation. This was a key concern shared by the Future Fund, which highlighted that we may face an environment where inflation remains elevated and growth slows in the coming years. This scenario could be amplified by factors such as geopolitical conflicts. In this kind of environment there is a real risk of simultaneous slow growth, high unemployment and rising prices. In the meantime, the RBA dialled down its future growth projection further, to 1.5% over 2023. Slower global growth and tighter financial conditions were cited as main concerns.
Elevated inflation can, broadly speaking, create significant issues for investors.

For instance, the correlation between bonds and equities, accounting for the lion’s share of Australian super funds, tends to rise during high-inflationary periods. Gold, on the other hand, remains an effective diversifier as inflation rises and Gold helps achieve return targets and enhance portfolio performance.

While we acknowledge that the benchmark test introduced by the “Your Future, Your Super” reform (YFYS) in 2020 has created a number of challenges for super fund managers, notably introducing performance mismatches across certain asset classes resulting in unnecessary tracking error at the portfolio level, Australian investors could utilise gold to cope with above-mentioned macroeconomic challenges, as the Future Fund did.

Moreover, superannuation funds continue to be subject to a multitude of other performance measures, particularly the fund’s own target return for members (typically CPI+X%). The inclusion of real assets such as gold could help meet this objective and protect the real value of members’ savings over time.

Gold, in AUD in Australia has delivered a steady return in 2022 while major assets including equities and bonds plunged. Its stability and defensiveness, among other qualities, have caught global and local institutions’ attention.

Looking at 2023, we see potential challenges of elevated inflation and an economic slowdown, key ingredients of stagflation. This could severely disrupt financial markets and hurt investors’ portfolios. By examining past data, it was found that not only can gold remain an effective equity risk diversifier when inflation is elevated, it also posts superior performances during the stagflationary environment.

Furthermore, gold strategic role in Australian super fund portfolios may increase in importance as it helps achieve their CPI+X% target and enhance risk-adjusted returns.