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 as much as an investment. As such, gold can play four fundamental roles in a portfolio:

  • a source of long-term returns

  • 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.

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%.

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 (Chart 1).

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.

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.

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.

Chart 1: Gold has delivered positive returns over the long run, outperforming key asset classes

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Copyright © 2019 The Oxford Gold Group - All Rights Reserved. The statements made on this website are opinions and past performance is no indication of future performance or returns. Precious metals, like all investments, carry risk. Gold, silver and platinum coins and bars may appreciate, depreciate or stay the same depending on a variety of factors. The Oxford Gold Group cannot guarantee and makes no representation, that any metals purchased will appreciate at all or appreciate sufficiently to make customers a profit. The decision to purchase or sell precious metals, and which precious metals to purchase or sell, are the customer's decision alone, and purchases and sales should be made subject to the customer's own research, prudence, and judgment.