On a Roll: Gold has had a good year in 2016

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Gold has had a good year in 2016—and A structural shift in asset management is likely to keep investors coming back.

Gold has been on a roll lately. It has been one of the strongest performing assets this year. The per-ounce price has risen more than 16 percent, from $1,060 on January 1 to $1,265.55 on October 23, according to World Gold Council (WGC) statistics. Holdings of gold-backed exchange-traded funds (ETFs) are on the upswing as well, although they still have some distance to travel to regain their highs of recent years.

But gold’s rising popularity has more fundamental—and possibly more long-lasting—causes. “Many investors who have been underweight in gold are now rebalancing their portfolios,” says Juan Carlos Artigas, director of investment research at the WGC. “We expect this trend will continue in the rest of 2016 and beyond.”

Gold plays several roles in an investor’s portfolio. “Gold can help with risk management and capital preservation,” says Artigas. “Gold also adds to the diversity of the asset allocation mix, such as a traditional 60-40 equities-bonds portfolio.”

In an uncertain geopolitical and economic climate, asset volatility is a major concern for investors. By helping to stabilize a diversified portfolio, gold can address that challenge and potentially increase an investor’s risk-adjusted returns, Artigas adds.

Gold is also a valuable tool for capital preservation, as it tends to perform well in negative economic environments that push down the value of other assets. “Gold can help investors protect their assets from other threats, including inflation and currency depreciation, which can have a devastating effect on a portfolio,” says Artigas.

Globally, the size of the gold market is about $2 trillion to $2.5 trillion, including gold bars, coins, ETFs and related instruments, he notes. About $120 billion to $220 billion is traded every day—a combined liquidity that is comparable to the activity in the sterling-U.S. dollar market and higher than many other popular asset classes.

Investors have multiple ways to gain exposure to gold. “Gold-backed ETFs can be a very cost-effective way to access this asset,” Artigas says. “The spreads are tight and fees are reasonable.” In fact, gold-backed ETFs have seen a record $29 billion inflow through the first nine months of 2016, according to the WGC.

Other investment options include gold bars or coins, which have storage and insurance costs; derivatives, which require active monitoring and management; and mining company equities, which add exposure to the stock market. “There is no single solution that fits all investor needs, and many of these strategies complement each other,” says Artigas.

Looking ahead, Artigas believes the global environment favors sustainable investment in gold. He points to the high level of uncertainty in the global financial system, due to such concerns as Brexit, tensions in the Middle East and the economic slowdown in several key emerging markets.

In addition, the sustained period of low interest rates has precipitated a structural shift in asset management. “That climate will continue in 2017, even with a small rate hike from the Federal Reserve,” says Artigas. “As a result, there is a very low opportunity cost associated with holding gold.”

The search for higher yields on their portfolios is driving many long-term investors, such as pension funds and insurance companies, beyond their traditional reliance on fixed-income securities. In order to generate a sufficient return to meet their liabilities, many investors are moving into higher-risk assets such as equities and lower-rated bonds. “Gold can help balance the increased risks associated with those assets,” Artigas says. “It’s one of the many ways that gold can help investors achieve their strategic objectives.” —Richard Westlund 

Juan Carlos Artigas: Director, Investment Research, Word Gold Council • 212.317.3826 • juancarlos.artigas@gold.org.
World Gold Council: 10 Old Bailey, London EC4M 7NG, United Kingdom • T +44 20 7826 4700 • F +44 20 7826 4799 • www.gold.org

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