This section is comprised largely of material researched and released by the World Gold Council, the worlds leading authority on gold market research and analytics.
What are private investors looking for?
A reasonable degree of certainty. Gold can offer this as a modest part of any balanced investment portfolio, in terms both of wealth creation and preservation. As a tangible, real asset, gold is more easily understood and trusted than more complex, esoteric financial instruments, nowhere more so than in the East where demand for physical gold outpaces the West.
In Japan, as Abenomics was implemented throughout 2013, pension funds increasingly turned to gold, a trend that looks likely to continue.
In a world of complicated and unpredictable change, pensions and savings need to build on assets that reduce risk and stabilise returns. Gold can help deliver this valuable protection over the long term.
Retail buyers are embracing gold’s investment properties. Overall investment in physical gold bars and coins during the first three quarters of 2013 rose 36 per cent compared to the first three quarters of 2012. Even so, gold still only makes up less than one per cent of investors’ asset allocations.
Investors of all levels of experience are attracted to gold as a solid, tangible and long-term store of value that historically has moved independently of other assets.* Our analysis shows that gold can be used in portfolios to protect global purchasing power, reduce portfolio volatility and minimise losses during periods of market shock. It can serve as a high-quality, liquid asset to be used when selling other assets would cause losses. National central banks, stewards of the world’s largest long-term investment portfolios, use gold to mitigate portfolio risk in this way, and have been net buyers of gold since 2010.
Gold has also become more readily accessible, due to the development of a range of products, which investors and advisors can include in their own and their clients’ portfolios. The diversity of gold-backed and gold-related products means that gold can be used to enhance a wider variety of individual investment strategies and risk tolerances.
Investors also make use of gold’s lack of correlation with other assets to diversify their portfolios and hedge against currency risk.
Individuals: Saving for the Future
For small savings or a more substantial long-term investment, buying gold or gold-backed financial products protects wealth and can increase risk-adjusted returns. Having a small amount of gold within a balanced investment portfolio can potentially reduce its overall risk, helping to protect against market shocks.
While it is reassuring to have a physical asset of enduring value, investors buy gold for many other sound financial reasons.
Gold helps protect the value of money
Gold is a tangible asset which cannot be printed at will. As such, it protects against inflation and currency devaluations. For example, in 1971, a family in the US could buy a house with US$25,000. Today, US$25,000 is not enough for a mortgage deposit. By contrast, 700 ounces of gold (the equivalent of US$25,000 in the 1970s) can buy a US$1 million property today. A growing body of research has shown that having a portion of savings in gold can improve purchasing power over the long term, especially as the real value of most major currencies declines.
Gold performs under pressure
In turbulent times, gold is resilient. The amount of available gold is constrained and cannot be expanded at will, as is the case for fiat currencies through expansionary monetary policies – especially in times of financial and economic crisis. Additionally, unlike a stock, where the underlying company can go out of business, or a bond, where the issuer may default on a coupon or redemption payment, gold has no credit risk.
The long-term outlook for gold is strong
Demand for gold continues to outstrip supply. Jewellery and technology applications make up more than 50 per cent of demand, and most gold is bought in the world’s fastest-growing emerging markets. China and India account for more than half of all gold purchases, annually. Newly-mined gold can only meet about two-thirds of current global demand. In addition, central banks are no longer net sellers of gold, so the rest of the demand is currently fulfilled with recycled gold. With demographic and economic trends predicting increasing wealth and expanded populations in the world’s two largest gold markets, gold demand has the potential to continue rising.
It is easier to buy gold than most people think
There is a common misconception that investing in gold is complicated. Today, there are many ways to invest in gold. Through the advent of exchange-traded funds (ETFs) such as GLDⓇ , investing in gold is as easy as investing in a stock or share. The PGF team has reviewed the various gold ETF's and funds available, and has developed PGF with distinct advantages over existing vehicles. Other ways to invest in gold include purchasing physical bars and coins. Some investors also take exposure to the gold price through index trackers or gold industry stocks and shares. The alternatives continue to expand. Further, the market is highly liquid, meaning that it is easy to buy and sell gold on demand, including through online platforms and at some of the world’s largest banks, 24 hours a day.
Institutions: Asset Allocation Strategies
Gold has experienced significant price appreciation in the last decade, and investors have taken advantage of rising prices. However, gold’s most compelling benefits derive from its lack of correlation with other asset classes, making it a valuable tool for portfolio diversification and risk management in an asset allocation strategy.
Gold’s sources of demand are geographically diverse and range across a number of unrelated sectors, from jewellery and technology to the financial markets. This is often sustained despite changing market conditions, as stronger investment demand balances falling consumer spending during periods of recession.
This diversity of demand means that gold is normally not correlated with many of the assets that make up a typical investment portfolio. This makes it a valuable tool for portfolio diversification which typically endures in both stable and unstable financial periods.
Why invest in gold? Gold’s role in long-term strategies
The stresses on the financial system since the credit crisis in 2008 have undermined confidence in the world’s major currencies. A change in the balance of the world economy has led to a widespread belief that the Chinese renminbi will take on a larger role in the global monetary system. The World Gold Council has published research into the function that gold will play during the transition to a multi-currency system.
Gold, the renminbi and the multi-currency reserve system - summary
Gold, the renminbi and the multi-currency reserve system
Gold’s typically strong inverse correlation with the US dollar and many other developed-markets’ currencies make it a valuable hedge against short- and long-term fluctuations in the value of major currencies. Because it normally also holds its value against major currencies, gold is also effectively used as an inflation hedge.
Gold and US interest rates: a reality check
Investors can benefit from gold’s role as a diversifier. Gold can be used to reduce portfolio volatility, minimise losses during periods of market shock, and serve as a high-quality liquid asset when selling other assets would incur large costs or losses.
Gold has very low correlation to most assets over the long run, making gold’s contribution to portfolio volatility small. In fact, in most instances, gold helps to reduce volatility significantly. The 24-hour nature of trading and the range of investment channels for gold mean that its markets are deep and liquid. Gold is virtually indestructible, meaning that nearly all of the gold ever mined still exists today. Much of it is in tradable form, meaning that sudden excess demand usually can be satisfied relatively easily. Unlike debt instruments, investments in gold do not depend on an underlying company or sovereign which can default.
Gold in the global financial architecture
In an uncertain world where many governments remain highly indebted and geo-political tensions continue to rise, central banks hold gold as a form of portfolio insurance. Gold also plays an important role in central bank diversification strategies, given its lack of correlation to other reserve assets. In fact, central banks ascribe so much value to gold that they have been net purchasers for 15 consecutive quarters.
In 2014, a new Central Bank Gold Agreement (CBGA) was signed, firmly reasserting gold’s role as a core financial asset in global monetary reserves – and provided a clear signal that gold sales are, essentially, complete.
The agreement is the fourth of its kind and states that signatories will continue to coordinate gold transactions over the next five years in order to avoid market disturbances and preserve market clarity and transparency; good news too for the many countries where gold production is a significant proportion of their GDP.
Since the 2007 financial crisis “de-risking” the system has been a key priority for the G20 and global regulators. There has been a global commitment to improving transparency in financial markets and to increase the level of high quality collateral available to better match risk taking between financial institutions, intermediaries and professional investors. Recent years have seen a raft of new legislation and agreements to this end.
For the global banking system, liquidity remains a major concern. Banks, financial institutions and investment houses can now directly benefit from gold’s value as a high quality liquid and stabilising asset. The European Market Infrastructure Regulation (EMIR) which allows clearing houses to use gold as securities trading collateral came into force in 2012.
Banking on gold – new trends in reserve asset management
Central bank governors, a serious bunch by and large, are only human. They seek security. Gold can fulfil a monetary function and acts as a protector of the value of reserve assets as a whole.
Central banks are increasing their holdings of gold as a percentage of reserve assets. As a new financial architecture emerges in the post-crisis world, it is clear gold has acquired a new relevance.
Since 2009, when they first became net purchasers of gold, central banks have bought heavily. 2012 saw levels of buying not seen for five decades. Indeed, by the end of 2013 central banks had been net purchasers of gold for 12 consecutive quarters. Central banks, uncertain about quantitative easing tapering and concerns around the US debt ceiling, continue to diversify away from the US dollar and sovereign debt and recognise gold’s qualities as a reserve asset.
Uncertainties are ever present for central bankers. In emerging markets for example, gold will continue to be a key tool to manage risk. Last year alone, central banks purchased 409 tonnes of gold, illustrating the importance reserve managers place on gold.
When times are uncertain gold’s capital preservation qualities stand out. Gold’s low correlation to developed-market movements and risky assets make it a “foundation asset”, regardless of prevailing cycles.
It is proven to reduce portfolio risk in a wide range of markets and conditions. Measured over the five years of the recent financial crisis, a study of financial returns during stress periods, including the Lehman Brothers’ collapse, European debt crisis and Greek bailout, shows gold to be the best performing asset against a basket of other high quality liquid assets such as government bonds and cash.
Raising allocations to gold in the light of uncertain prospects for currencies is a strategically sound option. As central banks and sophisticated investors seek optimal diversification of their portfolios, gold’s ability to protect and enhance wealth will ensure it remains an enduring part of their investment strategies.
Chinese View on Gold
Gold is synonymous with money in Chinese culture - in fact the symbol 金 is the same for gold and money - and has been a preferred form of savings for generations, so it is not surprising that it has become an increasingly important part of the financial system. Gold is seen as a stable, accessible and liquid investment. One which is particularly attractive given a lack of alternative savings options.
Gold may play a role in a portfolio to mitigate risk
Major losses across a portfolio may occur as we have seen in 2008, if all portfolio assets are dependent on specific systems such as stock markets or banking systems, to remain functional and liquid. Recent events have shown that even portfolios which are diversified across financial products can suffer heavy losses if systemic issues arise, if appropriate steps are not taken to protect the entire portfolio of assets.
Risk Mitigation Areas
Currency Risk (Inflation, Deflation, Hyperinflation, Collapse)
Bond Market Risk
Equities Markets Collapse
Stabilization of markets caused by failing institutions and western nation debt has required unprecedented Quantitative Easing by Central Banks globally. This has led to increased volatility, and an almost addict like reliance on continued stimulation by the markets.
Volatility in the global financial system has prompted Central Banks to reverse a two decade policy of reducing the size of foreign reserves held in gold. Central Banks have now switched from a two decade trend in selling gold as foreign reserves and become net buyers.
Gold is more commonly viewed as a “Strategic Monetary Asset” as well as a legitimate foreign exchange portfolio asset by Central Banks, and the one safe haven against Quantitative Easing by the global financial markets.