- Central bank investment objectives rank capital preservation as primary importance;
- Looking back to 1973, gold has preserved its value in real terms both over the entire period and, importantly over different phases of the business cycle--both expansionary and contractionary;
- In comparing the performance of gold relative to other reserve assets, it was the only major asset class to preserve its value in real terms during periods of stagflation;
- Looking ahead to the impact of COVID-19 over the medium term, the possibility of an economy characterised by low levels of growth and upward price pressures has increased because of both the negative impact on demand and investment as well as the higher cost of doing business and supply side disruptions;
- Thus, for those investors focused on capital preservation, gold may be safer by this metric than traditional reserve assets such as government bonds over a medium term horizon.
Central bank investment objectives typically rank capital preservation as a top priority. And, the best measure of capital preservation would be the real investment return, or the total return adjusted for price inflation. This gives an indicator of the preservation of purchasing power, which is central banks’ underlying goal in the investment of its foreign currency assets.
When viewed over long periods, gold’s performance with respect to capital preservation is quite similar to governments. As illustrated in Chart 1, both gold and US Treasuries achieved positive real returns of around three percent on an annualised basis over the last half century.