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The role of gold in portfolios is changing in the current volatile landscape. As part of this, a new report from Clear Path Analysis in conjunction with State Street Global Advisors (SSGA) looks at the trends in the market and what you need to know.
Featured in the report is the transcript of an in-person discussion with Chief Investment Officers and senior investment professionals from insurers, asset managers, and the World Gold Council, as well as a whitepaper on the themes that emerged from the discussion by Sara Benwell, Contributing Editor, Clear Path Analysis.
Below is an excerpt from that whitepaper.
In the past five years, investors have been confronted with a series of shocks including, but not limited to, the global pandemic, widespread inflation, and the war in Ukraine. Unsurprisingly, these conditions have created significant market volatility across several asset classes.
“On our policy holder portfolios, given the long-term views it doesn’t shift fundamentally, you move your asset allocations around the edges.”
As a senior representative from Aon put it: “In 2020, COVID happened, and the stimulus launch was five times that of the global financial crisis. We had the biggest inflation shock that we’ve seen for 45 years; we had the biggest interest rate shock afterwards. This has produced a regime shift.”
However, for some of our panellists, this volatility is business as usual, and so its influence on portfolio construction has been less significant than one might expect.
An asset allocator at Phoenix Group said: “On our policy holder portfolios, given the long-term views it doesn’t shift fundamentally, you move your asset allocations around the edges.”
An investment officer at Foresters Friendly Society added: “We try to be as nimble as possible. We have a manager that does tactical positioning for us, but the view has not diverged much from the strategic asset allocation (SAA).
The panellists had mixed views when it came to considering the role of gold as a safe haven for investors. One said that a common criticism was the lack of yield; however, he argued that investors were missing the benefits of hedging.
He explained: “The reason gold doesn’t have a yield is because it has no credit risk. There is no one at the end promising to pay you a dividend or coupon. [However], this means there is a decent credit risk hedge. Also, to some extent, you are protecting the income from your other investments; you have your yield investments, and gold is there to balance that out.”
“We are in a difficult time now, which is why we advocate gold as a strategic hedge – because you don’t know when something might happen."
“Central banks have been piling into this, mostly emerging, but a couple of developed as well. This highlights a shift in allocation priorities, and these banks are the most risk-averse investors out there. They have been buying a lot of gold to diversify, partly to protect against inflation and partly protecting against volatility in currencies.”
Another participant agreed that gold could be a valuable hedge tool. He said: “We are in a difficult time now, which is why we advocate gold as a strategic hedge – because you don’t know when something might happen. Our sense is that investors generally feel more comfortable doing gold investing opportunistically because that has worked. There are different routes into how you can represent gold in portfolios, and each has merits.”
This sentiment echoed the experience of the panel, many of whom were taking less traditional routes to gain exposure. A fund manager at the discussion said: “Gold is a pure commodity and not part of our benchmark. Given that our benchmarks, even investment grade, are yielding close to 6% and high yield is 10-12%, it would be quite an opportunity cost investing in a zero-carry asset.”
He added: “That being said, we do like the gold producers, and we have exposure via their bonds. Being emerging-markets-based, gold producers pay quite generous yields but also are high quality companies – especially the South Africans. It’s investment grade, solid credits with 6-7% in dollars for moderate duration risk.”
One of the heads of investment strategy said that his organisation, abrdn, thought fixed income was a better diversifier in the current environment, adding that it was crucial to consider the opportunity costs of gold. He said: “Anytime we’re talking about asset classes to invest in, we have to accept that we won’t invest in something else. Even cash has a return so if you want to allocate to gold, there is something that you are having to give up within your broader asset allocation.”
Another participant, the asset allocator, said she felt the benefits of gold depended on “the type of market you are in”. She added: “We are now in an environment of either cost-push or demand-pull inflation depending on what happens, so there is a question mark about the utility of gold within portfolios in these environments.”
“There will be pockets of illiquidity in this new regime that we need to confront and thus allocation to an area in an area like gold."
SSGA’s Ryan Reardon, Vice President, SPDR ETF Senior Strategist, said that investors must consider the benefits gold could bring to a strategic asset allocation (SAA), and not just from a risk-return perspective.
He said it was important to question what gold “allowed you to do” within the portfolio “vis-à-vis the allocation to potential pools of illiquid assets, especially given the expectations of risk-return on those premia”.
Reardon added: “There will be pockets of illiquidity in this new regime that we need to confront and thus allocation to an area in an area like gold. Our mandates do allocate tactically and strategically to gold, and they are 2% overweight in the tactical asset allocation.”
