Gold traditionally maintains its value over time, as it's a highly liquid asset, which does not carry any credit risk or liability and is scarce. It also reaps the advantages of demand from a variety of sources, including investments, reserve assets, jewelry, and technology components.
The World Gold Council asserts that when taken as a whole, these qualities make gold an obvious complement to stocks and bonds and a welcome addition to diversified portfolios.
A well-diversified portfolio should include gold as a strategic long-term investment and as an important allocation. By keeping a long-term allocation and taking advantage of gold's reputation as a safe haven during times of economic uncertainty, investors have been able to recognise a significant portion of gold's value over time.
According to a recent report by the World Gold Council, there are significant consequences associated with the move towards a greater integration of environmental, social, and governance (ESG) goals within investment strategies, and gold can play a part in supporting these.
Gold should to be acknowledged as an asset that comes from a supply chain that upholds strict ESG standards and is responsibly sourced and distributed. In order to lessen investor exposure to climate-related risks, gold may also be useful.
In its study titled 'The Relevance of Gold as a Strategic Asset 2023', the World Gold Council outlines three major ways that gold can improve a portfolio. Let's take a look.
A long-term source of return
Gold has long been regarded by investors as a valuable commodity during times of uncertainty. However, historically, it has produced long-term gains in both good and difficult economic periods. Due to its numerous sources of demand, gold is particularly resilient and has the potential to produce decent returns under a variety of market circumstances.
On the one hand, gold is frequently used as an investment to safeguard and grow wealth over time, and on the other hand, it is also a consumer product due to demand for jewellery and technology. The need for countercyclical investments during uncertain economic times is what raises the price of gold. Procyclical customer demand helps it perform well when the economy is growing.
Together, these elements give gold the capacity to offer security in a variety of economic environments.
The data supports the idea that gold is a good inflation hedge: since 1971, it has outperformed both the US and global consumer price gauges (CPI). Additionally, gold shields investors from excessive inflation.
When inflation was between 2% and 5%, gold's price typically grew by 8% annually. With even higher inflation rates, this figure rose noticeably. In the long run, gold has thus served to both protect and increase wealth.
"Our research also shows that gold should do well in periods of deflation. Such periods are characterised by low interest rates, reduced consumption and investment, and financial stress, all of which tend to foster gold demand," said the report.
Diversification that works
The distinction between gold and other risk assets is that as these assets decline, gold's negative association to them grows.
Equities and other risky assets, as well as hedge funds, real estate, and the majority of commodities—long seen as portfolio diversifiers—saw value declines and contrarily, the price of gold remained steady and increased, rising 21% in US dollars between December 2007 and February 2009.
Gold's performance held up well during the most recent severe stock market declines in 2020 and 2022.
"Our analysis bears this out, showing that when equities rally strongly, their correlation to gold can increase. This is driven by a wealth-effect supporting gold consumer demand, as well as demand from investors seeking protection against higher inflation expectations," said the report.
The gold market is sizable, international, and very flexible. In addition to the US$1.0 trillion in open interest in derivatives traded on exchanges or in the over-the-counter (OTC) market, the report estimates that investors' and central banks' physical gold assets are valued about US$4.8 trillion (trn).
Additionally, the gold market is more liquid than many other significant financial markets, such as the euro/yen and the Dow Jones Industrial Average, while trading volumes among main dealers are comparable to those of US 1-3 year treasuries and US T-Bills.
"The scale and depth of the market means that it can comfortably accommodate large, buy-and-hold institutional investors. In stark contrast to many financial markets, gold’s liquidity does not dry up, even at times of financial stress. Importantly too, gold allows investors to meet liabilities when less liquid assets in their portfolio are difficult to sell, or mispriced," said the report.