The Relevance of Gold As A Strategic Asset (2019) – World Gold Council
Gold is a highly liquid yet scarce asset, and it is no one’s liability. It is bought as a luxury good and store of value as much as an investment.
As such, gold can play four fundamental roles in a portfolio:
- a source of long-term returns; outperforming key asset classes over 20 years & since 1971 (must see table below)
- a diversifier that can mitigate losses in times of market stress
- a liquid asset with no credit risk that has outperformed fiat currencies
- a means to enhance overall portfolio performance.
Our analysis shows that adding 2%, 5% or 10% in gold over the past decade to the average pension fund portfolio would have resulted in higher risk-adjusted returns.
Average annual return of key global assets in US dollars* As of 31 December 2018.
Why gold, why now
Gold is becoming more mainstream.
Since 2001, investment demand for gold worldwide has grown, on average, 15% per year. This has been driven in part by the advent of new ways to access the market, such as physical gold-backed exchange-traded funds (ETFs), but also by the expansion of the middle class in Asia and a renewed focus on effective risk management following the 2008–2009 financial crisis in the US and Europe.
Today, gold is more relevant than ever for institutional investors. While central banks in developed markets are moving to normalise monetary policies – leading to higher interest rates – we believe that investors may still feel the effects of quantitative easing and the prolonged period of low interest rates for years to come.
These policies may have fundamentally altered what it means to manage portfolio risk and could extend the time needed to meet investment objectives.
In response, institutional investors have embraced alternatives to traditional assets such as stocks and bonds. The share of non-traditional assets among global pension funds has increased from 15% in 2007 to 25% in 2017. And in the US this figure is close to 30%.1
Many investors are drawn to gold’s role as a diversifier – due to its low correlation to most mainstream assets – and as a hedge against systemic risk and strong stock market pullbacks. Some use it as a store of wealth and as an inflation and currency hedge.
As a strategic asset, gold has historically improved the risk-adjusted returns of portfolios, delivering returns while reducing losses and providing liquidity to meet liabilities in times of market stress.
A source of returns
Gold is not only useful in periods of higher uncertainty. Its price has increased by an average of 10% per year since 1971 when gold began to be freely traded following the collapse of Bretton Woods. And gold’s long-term returns have been comparable to stocks and higher than bonds or commodities (See Chart 1 above).2
There is a good reason behind gold’s price performance: it trades in a large and liquid market, yet it is scarce.
Mine production has increased by an average of 1.4% per year for the past 20 years. At the same time consumers, investors and central banks have all contributed to higher demand.3
On the consumer side, the combined share of global gold demand from India and China grew from 25% in the early 1990s to more than 50% in recent years.4
Our research shows that expansion of wealth is one of the most important drivers of gold demand over the long run. It has had a positive effect on jewellery, technology, and bar and coin demand – the latter in the form of long-term savings.5
Additionally, investors have embraced gold-backed ETFs and similar products to get exposure to gold. Gold-backed ETFs have amassed more than 2,400 tonnes (t) of gold worth US$100 billion (bn) since they were first launched in 2003.6
And since 2010 central banks have been net buyers of gold in order to expand their foreign reserves as a means of diversification and safety.
Excellent Latest Research Report On Gold As A Strategic Asset Today Can Be Accessed in Full Here
News and Commentary
Gold extends losing streak, Jan. holdings in gold-backed ETFs reach their highest level since 2013 (MarketWatch.com)
Gold slips as dollar gains, investors eye trade talks (CNBC.com)
Aussie tanks on central bank rate view; U.S. dollar firm (Reuters.com)
Argentine CB buys a total of $75M in two interventions ($835M so far this year) (Reuters.com)
ECB to probe 100 banks’ cash strength in new stress tests (RTE.ie)
Maduro sold 40% of Venezuela’s gold last year amid cash crunch (Bloomberg.com)
Wall Street Veteran Says U.S.-China Deal Will Be Sell Trigger (Bloomberg.com)
4 Remarkable Charts Plus A Look At Gold (KingWorldNews.com)
Do bullish gold investors now have reason to worry? (MarketWatch.com)
How A U.S. Nuclear Strike Works (ZeroHedge.com)
It “Haunts My Life”: Americans Over-60 Owe $86 Billion In Student Loan Debt They Can’t Discharge In Bankruptcy (ZeroHedge.com)
Is France Mortgaging Its Gold Stock? (PolitiqueMagazine.fr)
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Gold Prices (LBMA PM)
06 Feb: USD 1,313.35, GBP 1013.51 & EUR 1,152.86 per ounce
05 Feb: USD 1,314.00, GBP 1009.15 & EUR 1,150.67 per ounce
04 Feb: USD 1,311.00, GBP 1004.36 & EUR 1,145.55 per ounce
01 Feb: USD 1,320.75, GBP 1008.54 & EUR 1,150.83 per ounce
31 Jan: USD 1,322.50, GBP 1006.95 & EUR 1,152.16 per ounce
30 Jan: USD 1,312.95, GBP 1002.04 & EUR 1,148.44 per ounce
Silver Prices (LBMA)
06 Feb: USD 15.73, GBP 12.15 & EUR 13.82 per ounce
05 Feb: USD 15.86, GBP 12.19 & EUR 13.89 per ounce
04 Feb: USD 15.74, GBP 12.05 & EUR 13.75 per ounce
01 Feb: USD 16.01, GBP 12.26 & EUR 13.96 per ounce
31 Jan: USD 16.07, GBP 12.24 & EUR 13.99 per ounce
30 Jan: USD 15.91, GBP 12.15 & EUR 13.92 per ounce
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– U.S.-China War May Be “Just A Shot Away”
– Buy Bitcoin or Gold? Bitcoin Buyers Investing In Gold In 2019
– Gold Consolidates Above $1,300 After 1.2% Gain Last Week
– Gold Bullion Will Protect From Politicians, Brexit and Increasing Market Volatility In 2019
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