At a Glance
- Recent equity volatility shows gold’s allure as a store of value remains strong
- Growing or declining economic growth in developed countries is still a strong signal for gold
Gold can play an important role in anyone’s portfolio from the individual investor to the largest financial institutions. It can provide multiple functions, but here are three key ones:
Source of long-term returns. Since 2001, investment demand for gold worldwide has grown, on average, 15 percent per year. There are a number of reasons for this such as the advent of physical gold-backed exchange-traded funds (ETFs), the increasing size of the middle class in India and China that deeply value the precious metal in their culture; and a painful reminder what a financial crisis can do to one’s equity portfolio.
Vital diversification asset in times of market turmoil. Then 2008 – 2009 crisis, the Long-Term Capital near financial system meltdown in 1998 and the various currency scares we have experienced over the past two decades have proven gold to be a valuable diversifier of portfolios.
No credit default risk. Unlike bonds, gold is a physical asset with limited supply. There is no risk of a credit default, and over time gold has outperformed fiat currencies.
But is gold still a flight to quality asset?
It is fair to say that the global slowdown is a very real threat to the entire economy across all borders. China trend growth is declining as it moves into being an economy more like the United States and the Eurozone than an emerging market. The lack of European and U.S. economic momentum and policy paralysis invites comparison to Japan. This comparison will persist and reduce the attractiveness of growth-sensitive assets like equities and increases the allure of gold as a store of value.
Growing or Declining?
The negative correlation between U.S. real yields and gold prices is well known over time. It makes very simple sense. In declining developed markets (the United States, the Eurozone, Japan, etc.) real yields reduce the attractiveness of traditional investment vehicles and lead investors to seek investments in alternative assets, higher-yielding emerging markets, and gold.
Rising real yields, on the other hand, increase the opportunity cost of investing in non-interest bearing assets such as gold compared to other safe-haven investments such as Treasuries. The recent global central bank (mainly in the US) pivot to a more-dovish stance further makes the case for a monetary landscape that has become more gold friendly.
What The Market Is Telling Us
There is no doubt that in times of turmoil, gold is going to still be considered a safe-haven asset. There are also fundamental underpinnings that are supportive to the price of gold. If you look at a chart of gold (see below) it’s quite evident what the market is telling us.
It has continued to show price spikes in times of short-lived panic like early in 2019, but has since stayed near the 100-week moving average which is consistent with the price that has traded most often during that time period.
Gold is the same “quality” asset it has been traditionally, and it bears the same traits for investors and traders that it always has. The rushes to, or retreats from gold, however, are being influenced by as many factors as ever.