Gold as a Strategic Asset – in 2019 and Beyond – Arkadiusz Sieroń , PhD (09/04/2019)

Recently, the World Gold Council published a 2019 edition of a report on gold as a strategic asset. The industry organization released later the UK edition as well. Plenty of food for thought. How can the learnings from these publications strengthen our investment decisions?

Why Gold?

Why investors should add gold, that does not bear any yield, to their portfolios? There are a few really good reasons. First, gold is a source of long-term capital gains, and the gold market is both deep and liquid (liquidity is an important but sometimes forgotten factor when establishing a strategic holding by investors). The yellow metal has not only outperformed all major fiat currencies, but also bonds or commodities. According to the WGC, the price of gold has increased by an average of 10 percent per year since 1971 when gold began to be freely traded following the collapse of Bretton Woods. It makes gold’s long-term returns comparable to stocks.

There is a good reason behind gold’s great price performance in the long run: inflation. Gold returns have outpaced the US CPI. The end of the gold standard paved the way toward higher inflation, so the price of gold has soared in a new monetary regime, in which fiat money can be printed in unlimited quantities to support monetary policy. Not surprisingly, in such an environment, gold became one of the greatest hedge against extreme inflation. According to the WGC, in years when inflation has been higher than 3 percent, the price of the yellow metal has increased by 15 percent on average

Second, gold is a great portfolio diversifier due to its low correlation to most mainstream assets. This is a particularly desired feature during periods of heightened risk, when gold benefits from flight-to-quality, providing positive returns. In other words, the greater a downturn in stocks and other risk assets, the more negative gold’s correlation to these assets becomes. Gold is thus a safe-haven asset during periods of crises, which reduces portfolio losses, and an insurance against tail risk. It applies not only to the U.S., but also to Great Britain where gold has acted as a safe haven in times of heightened uncertainty since the Brexit referendum and Boris Johnson PM nomination.

This is why adding up to 10 percent in gold over the past decade to the average pension fund portfolio would have resulted in higher risk-adjusted returns. According to the WGC, for US dollar-based investors, but also for UK pound-based investors, holding 2 to 10 percent in gold as part of a well-diversified portfolio can improve performance, even if investors hold other inflation-hedging assets, such as inflation-linked bonds, or other alternative assets, such as real estate or invest in hedge funds of any kind.

Why Now?

Gold is becoming more mainstream. Since the end of Bretton Woods and the following central banks’ gold sales, the share of the private investors in the gold market has increased. The introduction of gold ETFs made gold an even more popular asset class and one easier to invest in. Today, gold is more relevant than ever for investors. First, the opportunity costs of holding gold have decreased substantially. In a world of ZIRP, NIRP, ultralow real interest rates or even negative bond yields, no income stream generated by gold is turning from a problem into a blessing.

Second, as we are possibly approaching the next recession – this is at least what an inverted yield curve suggests – gold should be more in demand as a safe haven and a hedge against systemic risk, stock market pullbacks, and central banks’ unconventional monetary policies. In a heavily indebted world, a liquid asset with no credit or counterparty risk is literally worth its weight in gold.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron
Sunshine Profits’ Gold News and Gold Market Overview Editor


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