Gold’s Relevance as strategic asset in 2022!

Gold’s Relevance as strategic asset in 2022!

Gold benefits from diverse sources of demand:
- as an investment,
- a reserve asset,
- jewellery,
- a technology component
- it is highly liquid,
- no one’s liability,
- carries no credit risk, and
- is scarce, historically preserving its value over time.
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Gold does not directly conform to the majority of the most common valuation methodologies used for equities or bonds. Without a coupon or dividend, typical models based on discounted cash flows, expected earnings, or book-to-value ratios, struggle to supply an appropriate assessment for gold’s underlying value. Investors focus again in 2022 on inflation, supply-chain concerns and Covid uncertainty.

Inflation was a prominent global theme throughout 2021 and is still a key input into 2022 investor decisions. While many central banks (CBs) felt the uptick in inflation levels was temporary on the back of COVID’s impact in the first part of 2021, this consensus shifted in the latter part of the year. Some CBs now acknowledge that inflation is here to stay for longer and are expected to raise rates in 2022. Conversely, other countries like China, India and the ECB are expected to continue accommodative policies.

Meanwhile, supply chain bottlenecks caused by the pandemic have not fully dispersed. It is true that governments proved reluctant to respond to the recent spike in Covid cases with formal shutdown measures of the sort that disrupted economic growth over the last two years, but new variants could change this behaviour, and a resurgence of supply chain disruption, across multiple sectors from technology to shipping, could negatively affect economic growth and create additional inflationary pressure.

While the market expects rates increases and a strong US dollar, a negative for gold price performance, real and nominal rates should remain at historically low levels. Gold has performed well into CB hiking cycles and has been an effective inflation hedge. Coupled with healthy jewellery and CB demand, and the potential for market volatility in a vastly changing world, the strategic rationale for gold in a portfolio, particularly as a portfolio hedge, remains compelling. Institutional investors have embraced alternatives to traditional investments such as equities and bonds in pursuit of diversification and higher risk-adjusted returns. For example, 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 26% in 2020, this figure is 30% in the US.

Gold allocations have been recipients of this shift. Investors increasingly recognise gold as a mainstream investment; global investment demand has grown by an average of 15% per year since 2001 and the gold price has increased almost seven-fold over the same period. Adding between 4% and 15% in gold to hypothetical average portfolios over the past decade, depending on the composition and the region, would have increased risk-adjusted returns.

Gold performance has been strong in recent decades, supported by key structural changes:
- Monetary policy: Persistently low interest rates reduce the opportunity cost of holding gold and highlight it as a source of genuine, long-term returns, particularly when compared to historically high levels of negative-yielding debt.
- Central Bank demand: A surge of interest in gold among central banks across the world, commonly used in foreign reserves for safety and diversification, has encouraged other investors to consider gold’s positive investment attributes.
- Market Risk:The global financial crisis prompted a renewed focus on risk management and an appreciation of uncorrelated, highly liquid assets such as gold. Today, trade tensions and concerns about the economic and political outlook have encouraged investors to re-examine gold as a traditional hedge.
- Market access: Gold-backed ETFs have facilitated access to the gold market and materially bolstered interest in gold as a strategic investment, reduced total cost of ownership and increased efficiencies.
- Emerging market growth: Economic expansion, particularly in China and India, increased and diversified gold’s consumer and investor base.

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