This has surpassed other notable market events in recent history.
- The 2008 financial crisis took the gold price to $978
- Quantitative Easing saw the expansion of monetary policy and in 2011 saw gold rise to $1815, and
- During the COVID-19 pandemic gold reached $1987 an ounce, which interestingly also saw ‘parachute money’ through furlough schemes, government company loans and central bank monetary expansion throughout the world to support everyone during lockdown.
When we review economic history, gold as a precious metal has gone from strength to strength, despite some investor concerns along the way. Here are some key points to consider as an adviser firm:
- Gold is considered a store value and a defence against economic uncertainty and historically has provided capital preservation.
- In 1971 Richard Nixon’s US government suspended the convertibility of US dollars into gold, which broke the technical link between the US dollar and gold as a store of value.
- This brought the era of fiat money – where the value of money is derived from peoples perceived value of holding currencies.
- Some investors take the view that gold has limited utility, although it has some intrinsic value in the form of jewellery and industrial applications, the commodity generates no yield, so price is driven largely by investor sentiment.
- Asset managers are acutely aware of current correlation between equity and bonds. In a world where asset classes like property have become less prominent, managers have looked to gold for diversification, to reduce the overall volatility of a multi asset portfolio.
- Monetary policy has added another dimension to the discussion around gold, particularly following monetary expansion during the COVID-19 pandemic. Quantitative easing and subsequent start of monetary tightening are having a greater influence in sentiment for gold.
- Central banks purchase gold as a diversifier to holding domestic currency and US dollars as the primary trade currency. As money supply has grown there has been greater demand for gold.
- The safe-haven status of gold as an asset class does attract liquidity benefits for investors in times of uncertainty. This could mean gold assets could still be subject to short term volatility as asset managers may use it as an instrument to meet short-term redemptions.
Points to raise with multi asset funds and discretionary managers at review:
- How do the portfolios offer diversification
- Do they hold gold as an asset class and are there limits to this holding
- If so, do they hold a strategic or tactical view on gold
Like all investments, gold as an asset class requires a level of understanding around how it can function in financial markets and clarity around its pros and cons as a defensive asset class. Firms can do this by considering whether it fits with their overall investment philosophy and whether it provides a layer complexity that goes beyond or supports overall objectives for a given client segment. Based on information from DD|hub, of the 86 ranges that feature on the system only 13% referenced they could use commodities or gold as an alternative asset within their investment strategy.