Gold as a strategic asset

The relevance of gold

is no one’s liability

Recently the World Gold Council has published, The relevance of gold as a strategic asset (2019), from investment perspective. That says 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, 1: a source of long-term returns, 2: a diversifier that can mitigate losses in times of market stress, 3: a liquid asset with no credit risk that has outperformed fiat currencies & 4: 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.

The WGC says, 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.