Higher interest rates increase the opportunity cost of holding gold and drive away investors. However, this oversimplification misses four key points:
- The long-term performance of the gold market is not solely linked to investment demand in developed markets or the US alone
- There is a strong correlation between economic growth and gold consumption (as a luxury good and as integral component in high-end electronics)
- Maintaining a proper portfolio risk management strategy is as important in good times as it is in bad
- The gold market has undergone several structural shifts that have increased the demand base. In Gold Investor, Volume 7, we explore these issues in greater detail.
Not all gold demand is counter-cyclical
First, we explore the connection between economic growth and gold through our analysis and third-party research in The growth dividend: how rising GDP lifts gold consumer demand. Investors understand that in times of economic duress high-quality, liquid assets such as gold are in high demand. What is less understood is that the majority of gold demand is linked to consumption and long-term savings and not to speculative investment. As an economy expands, incomes grow and gold demand increases – counter short-term investment flows. In turn, this pro-cyclical nature of consumer demand and counter-cyclical nature of investment demand make gold an effective diversifier and valuable portfolio component.
Tail-risk hedging should be a multi-environment affair
In A practical hedge: less exotic, multipurpose, lower cost, we make the case for gold as a valuable component of any portfolio risk-hedging strategy. The current low volatility environment has made many portfolio hedges “cheap” to buy, but that doesn’t mean that they are inexpensive to hold. We analyse and compare multiple investment vehicles commonly used as tail-risk hedges. Our research finds a compelling case for gold as a valuable hedge. It is cost-effective, easy to implement, and has a wide range of applications – even if its return during tail events is often lower than bespoke (and often derivative-based) tail risk-mitigating strategies.
The market has changed and more investors can gain access to gold more easily
Finally, we look at one of the most revolutionary structural shifts the gold market has experienced in Ten years of gold ETFs: a wider and more efficient market. Over the past decade, gold-backed ETFs have become a US$70 billion dollar market – with holders of all sizes and types spread across various geographies. Yet, the advent of ETFs has benefitted other gold investors as well: they have increased demand, democratised access, increased competition for new and existing gold vehicles, and contrary to popular belief they have responded to rather than driven gold volatility higher.
We hope you enjoy this edition of Gold Investor as much as we enjoyed writing it. If you have comments or questions on any of the articles you may reach us at [email protected].