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The latest gold price spike shows that the metal is still a strong sanctuary during times of financial crisis. But gold serves many important purposes in a portfolio, beyond its role as a haven.
The rapid spread of the coronavirus since December has sent global stock markets into freefall. Investors have sought safety by buying gold, pushing its price to a recent peak of $1,703 per ounce in early March.
The Federal Reserve and other central banks reacted to the crisis with monetary easing measures, such as cutting interest rates. This led to falling government bond yields, thus reducing the opportunity cost of bonds, and supporting gold further. A week after the peak, gold’s March high had receded and it now stands around $1,610. But some analysts believe it will remain a sound investment for several reasons.
Gold has grown around 10 per cent annually over the last 30 years – comparable to stocks, and more than bonds and most other asset classes. This continued growth is driven by a demand-supply imbalance. Mine production has only been able to increase 1.6 per cent a year over the last 20 years, thus limiting supply.
But strong demand comes from several sources.
Natalie Dempster, Macro Policy Lead at Cicero/AMO, and until last year managing director of the World Gold Council (WGC), says a misperception about the gold price is that it is driven by investment demand only. Actually, 40 per cent of demand comes from investment activity, the rest from the jewellery, technology and medical sectors, and from central banks.
“Incomes have grown sharply in China which has a high cultural affinity for buying gold.” – Natalie Dempster, Cicero/AMO
“For example, incomes have grown sharply in China and India, which both have a high cultural affinity for buying gold,” says Dempster. “Also, since the 2008 financial crisis, quantitative easing has increased money supply. You can print more money but cannot print more gold. So, gold does especially well in such an environment as an alternative to bonds.”
According to Juan Carlos Artigas, Director Investment Research at the World Gold Council, another supportive factor is that many emerging market central banks – including in China and Russia – have been adding gold to their reserves for safety and diversification. They have ‘de-dollarised’ over the past two decades towards other assets, including gold, partly because gold trades in a liquid market and does not carry credit risk as sovereign bonds do.
Investors can get gold exposure in many ways, including bars and coins; vaulted gold; gold-backed exchange traded funds (ETFs); and mining stocks. They can also invest through paper gold – derivatives of the physical metal that can be converted to physical gold. Most investors hold a combination of these as each can serve a complementary role in a portfolio.
Although gold has long been available to Dolfin clients, via futures or ETFs, we are also now incorporating paper gold into portfolios for the first time.
Melody Lin, project manager on Dolfin’s China Desk, says many investment clients are fans of gold. “It still gives them a feeling of safety in bear markets such as that caused by coronavirus,” she says. “It works because the gold price tends to be negatively correlated to equity markets, meaning it tends to go up when equities go down.
“If a client wants to hold gold, we recommend they do it in a portfolio that is fully diversified.” – Melody Lin, Dolfin
“Most people who hold paper gold know they can exchange it for real gold, so it’s a safe and practical way to own it. However, if a client wants to hold gold, we recommend they do it in a portfolio that is fully diversified across assets globally.”
Investments available to Dolfin clients span government bonds, corporate credit, equities, commodities and currencies via direct exposure or ETFs, mutual funds, hedge funds, futures and options (albeit some of the instruments may not be available to retail clients for regulatory reasons). These cover more than 120 countries, including developed, emerging and frontier markets.
“We are making full use of this diverse mix of instruments to hedge the risk associated with the virus,” says Lin. “But we understand the importance of paper gold and are making it available for clients that request it specifically. Coronavirus will continue to support the paper gold market as well as political uncertainties related to trade wars, for example.”
Simon Black, head of investment management at Dolfin, says: “In an economic climate that will remain challenging, the addition of paper gold into portfolios provides clients with a similar, tangible level of comfort to that which they get from real estate. This comfort, combined with the diversification, safety and relative low correlation to other asset classes makes gold an important holding in uncertain times.”
Capital at Risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. The value of your investment and the income from it will vary and your initial investment amount is not guaranteed.