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From Perceived Safe Haven Asset to Strategic Allocation

An Institutional Investor Sponsor Report

  • State Street Global Advisors


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Gold has been perceived as a safe haven investment, with flows in and out as risk levels rise and fall. But increasingly, investors recognize the value of long-term strategic investments in an asset that provides a number of benefits.

It’s said that too much of a good thing can be wonderful — unless the good thing is an eight-year bull market about to enter its ninth. In a global environment that grows increasingly uncertain, with mounting geopolitical and economic concerns, it’s no wonder that investors are growing anxious and going back to basics. Economically, there’s nothing more basic than gold. But there’s more to the story: Even as many investors habitually retreat into the safe haven of gold, a growing number also recognize its benefits as a diversifying asset class that can lower portfolio volatility and provide a respectable return.

Gold returned just over 9 percent in 2016, which it could match again in 2017, and the medium-term forecast is positive. “We’re looking at moderate price increases well into 2018,” says George Milling-Stanley, head of gold strategy at State Street Global Advisors. Since the second quarter of 2013, gold has traded at between $1,150 per ounce at the bottom and $1,350 at the top. The overhead resistance of that range was tested recently, in September of 2017, at just above $1,350. “But the price couldn’t make a sustained breach — it usually takes several tries,” he says.

At the same time, the lows are creeping higher. Gold has dipped toward its support level with each of the last four interest rate hikes. “Historically, this tends to happen in the runup,” he says. During these periods, he explains, speculators tend to go long the dollar, expecting it to go higher, and to short gold, expecting it to soften as rates go up. Once the rate rise sets in, many unwind those trades by selling their dollars and buying back their gold. Each time, gold has found support at successively higher levels, which is often a precursor to higher highs. A significant spike in prices is also possible in the next 12–18 months, when speculators could take note.

Against this backdrop, State Street sees a growing number of institutions and high-net-worth individuals making long-term strategic allocations to gold. “This isn’t tactical, safe-haven buying,” says Milling-Stanley. Gold typically isn’t correlated with other assets, it provides diversification, and it’s more stable than many believe. Its 11–12 percent annualized volatility is marginally lower than the S&P 500 and in line with Berkshire Hathaway or Johnson & Johnson — and significantly lower than the 25–30 percent annualized volatility of the FANGs.

Positive dynamics exist within the gold market, as well. Decent economic growth in emerging markets continues, which not only supports a strong jewelry business, but also generates strategic investment. “The level of interest in gold as an investment from asset owners in emerging markets has become distinctly elevated,” Milling-Stanley says. Devaluations and other currency fears generate much of the interest. 

 Furthermore, since 2010, many countries are boosting their gold reserves as they sell U.S. Treasury securities. As a group, emerging markets have less than 5 percent of their reserves in gold, compared with about 70 percent for the advanced economies of Western Europe and North America. “We’re reminded each day that the world is a risky place,” says Milling-Stanley. “Those focused not on today’s or tomorrow’s risk, but on the overall level of risk that we live under, know the value of a long-term strategic allocation to gold.” — Howard Moore

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Exp. Date: 11/30/2018

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