The turmoil of the last year has clearly illustrated gold’s enduring appeal as a strategic asset that any investor needs to consider as part of their diverse portfolio.
Famed for its value as a safe haven at a time of crisis, gold duly performed its role in 2020, with the pandemic seeing investors fleeing to the metal, driving the price above $2,000 an ounce, its highest level ever in US Dollar terms. And while its price has subsequently fallen back as global stock markets have recovered, gold remains a consistent long-term provider of returns over time, outperforming most major asset classes in the last 20 years.
Gold’s strategic value also comes from its uniqueness. It’s a commodity with a finite supply that can’t be easily printed like currencies; but unlike other commodities it typically has an inverse relationship with stock markets during periods of “risk off”, so that when equities fall sharply, gold gains. Yet when markets are rising, gold has often recorded gains, illustrating it to be more than simply an asset at times of crisis. Furthermore, gold has a history that dates back millennia and has matured into an enormously liquid market, with daily trades equivalent to $183 billion in 2020. Among other major asset classes, only U.S. Treasuries and the combined traded volume of all stocks on the S&P 500 are more actively traded.
This impressive liquidity is boosted by the lack of counterparty risk that gold provides, with all bars conforming to internationally agreed standards, ensuring investors know exactly what they are buying or selling.
The physical nature of gold also sets it apart from other asset classes. For centuries gold has been desired for jewellery, while it has also evolved into having a modern-day demand from the technology sector as a key component in electronics. It is this physical demand that can see gold continue to rise at times of economic growth and stock market gains. So, besides it’s more traditional role as a safe haven asset at times of crisis, gold can also perform at times of growth.
Economic growth can often be accompanied by rising inflation, and this is another scenario in which gold can play a role, as a hedge against inflation. As inflation erodes the buying power of government-issued currencies, gold has been shown to be a long-term store of value. An oft-mentioned adage is that an ounce of gold has consistently been able to buy a tailored suit. In the 1960s, gold was pegged at $35 an ounce, about the same as a tailored suit, while today it is $1,850, which would still buy you a Savile Row suit.
The final element of gold’s appeal as a strategic asset is the diversification it offers. Gold is not correlated to other assets, so it can provide protection against volatility and uncertain market sentiment. As such, when investors pull back funds from the stock market and other asset classes at times of perceived increases in risk, gold is a popular destination for those funds. Furthermore, gold’s liquidity and store of value provide an easily redeemable option for investors needing to cover liabilities when other assets may be unavailable (property funds, for example) or have suffered sharp price drops.
It is this unique confluence of attributes that proved so popular during the coronavirus crisis and will keep gold treasured by investors to consistently deliver returns while being a point of difference to other assets for many crises to come.