Produced in partnership with State Street Investment Management.
Gold has been a reliable vehicle for protecting and accumulating wealth throughout history, especially during periods of political and economic instability.
This is due largely to the metal’s globally recognised value and unique characteristics including scarcity, durability and liquidity.
In the current environment of heightened political and economic uncertainty, gold’s role as a portfolio diversifier and mechanism to preserve and build wealth for the long term is being elevated again.
According to Robin Tsui, vice president, APAC Gold Strategist at State Street Investment Management (formerly State Street Global Advisors), gold is often viewed as a safe haven and potential hedge against market uncertainty, and its perceived independence from governments and corporates may be contributing to increased interest in the asset class from both institutional and wholesale investors.
He also notes that a trend of de-dollarisation appears to be underway.
In this context, some investors are reportedly reducing their exposure to the US dollar and certain countries are exploring alternatives for trade settlement and reserve holdings. This development has coincided with increased allocations to gold.
“Gold is highly sought after right now because during periods of high inflation and market distress it has historically performed strongly and we’re seeing that play out,” Tsui says.
Over the past five years, starting with the advent of the Covid-19 pandemic, the gold bullion price has appreciated approximately 98 per cent to north of US$3000/oz ($4556).
Tariffs, trade tensions and global conflicts are further driving demand for alternatives to fiat money such as gold and, interestingly, cryptocurrency, according to Tsui.
“Cryptocurrencies like Bitcoin have been likened to gold since neither are tied to a specific country’s currency but cryptocurrency is no substitute for gold in a portfolio because gold demand is tied to a tangible commodity and the sources of that demand are both cyclical and counter cyclical,” he says.
“Gold is generally considered a well-established asset with liquidity in line with the most liquid traditional asset classes. It has historically served as a hedge during periods of heightened uncertainty and volatility, unlike Bitcoin which tends to behave more like a risk asset during significant tail risk events and market volatility.”
State Street Investment Management’s mid-year outlook forecasts that the gold price could sustain record levels of US$3100 to US$3500/oz by year end. In a bullish scenario, gold prices could range between US$3500 and US$3900/oz over the next six months, contingent on how global trade tensions unfold.
In the medium term, State Street is “bullish” on gold due to a combination of tactical factors, including uncertain trade policy; recession risks and potential quantitative easing from the US Federal Reserve; and structural factors, including central bank demand, sovereign debt burdens and the de-dollarisation theme.
“Whether a lingering global inflation impulse, trade war, US retrenchment, government debt loads or vox populi political movements, demand for gold as a low volatility, portfolio diversifying, perceived safe haven asset, should continue especially as the probability of distribution policy, geopolitical, and macroeconomic outcomes widens,” the State Street Investment Management report states.
Protection from pirates and thieves
While the age-old practice of burying gold to safeguard it from pirates and thieves is the subject of many documentaries and movies, and still happens today in parts of the world, people don’t need to buy and stash physical gold to protect and grow their wealth.
There are more convenient and effective ways to invest in gold without having to take physical delivery or arrange storage including investing in gold-backed exchange traded funds (ETFs) and unlisted managed funds.
With gold funds, underlying gold holdings are backed by allocated physical gold and stored in secure vaults.
They provide a liquid, cost-effective way of gaining exposure to the market and greater transparency as a 24-hour over-the-counter (OTC) market exists for gold bullion, providing daily market data.
Funds are also managed by experienced investment professionals.
This is particularly valuable for investors who gain exposure to gold as part of a diversified, multi-asset portfolio.
As a diversifier, gold has a risk and return profile uncorrelated to equities and bonds, hence it is often put in the alternatives bucket.
For several years, it has significantly outperformed equities and bonds, driving demand for gold funds, Tsui says.
“We expect demand to continue growing because wholesale and retail investors generally have limited exposure to gold in their investment portfolios, so they’re coming from a low base,” he says.
“The consensus among investors, particularly in the Asia Pacific region, is that they want to up their allocation.”
When it comes to portfolio construction, State Street Investment Management believes a long-term strategic asset allocation of 2-5 per cent in gold, which may seem low given the asset’s recent strong performance, but Tsui points out that there have also been multiple years when gold has underperformed.
“We would only recommend a smaller, but long-term strategic allocation to gold and the main caution is that throughout gold’s history, there are multi-year periods, especially in high-growth, low inflation environments that it has underperformed,” he says.
“An allocation in the region of 2-5 per cent still allows investors to have differentiated sources of return through each stage of the economic cycle while taking advantage of gold’s undoubted role as a diversifier.”
As for where investors should fund their allocation to gold from, Tsui says, in a typical 60/40 portfolio construct, it could come from either equities or bonds or a combination, although investors are increasingly taking it from bonds.
“We don’t tell investors and advisers where to fund their allocation to gold from but we’re increasingly seeing it come from bonds because bonds are also seen as a defensive safe haven,” Tsui says, adding that bonds had significantly underperformed gold for a number of years.
“We’re seeing some investors rotate out of bonds into gold because they serve a similar purpose, although gold does not provide income.”
