Our Chief Market Strategist, John Reade recently joined Norman Villamin and Peter Kinsella from UBP for a webinar on the strategic case for owning gold.
Watch as they discuss the key characteristics of gold, whether the recent gold rush is justified, the outlook for gold and more.
I took part in the Institutional Investor forum 'Be Careful What You Wish For - When Volatility Becomes Your Frenemy: Risk, Volatility and Liquidity in Today's Institutional Portfolios' last week.
Max Giolitti, Chief Risk Officer at Verus, moderated the conversation asking very insightful questions. We discussed the current environment for gold and the outlook for the rest of 2020 around price performance, investment demand and monetary policy implications
Our conversation was followed by an investors' panel featuring John Lewis, Director of Investment Operations and Risk Management at Annie E. Casey Foundation, Beau Smith, Senior Risk Manager at Maryland State Retirement and Pension System, and James Nield, Head of Risk at Texas Teachers Retirement.
We recently hosted a webinar for professional investors in which we discussed the impact of COVID-19 on gold, key Q2 and H1 2020 findings from our recently published Gold Demand Trends report and the outlook ahead for 2020.
Watch the presentation and conversation below between Claire Lincoln (Head of Sales EMEA), Matthew Mark (Head of Sales Americas) and Juan Carlos Artigas (Head of Research).
In this Pensions Age article, I explore the question; two-thirds of pension funds are deeply concerned about the future of the global economic and financial system: How might gold help?
Even before the Covid-19 global pandemic and its seismic impact, deep-seated concerns about the health of the global economy, historically low or negative interest rates, and geopolitical uncertainty have weighed heavily on investors’ and asset managers’ outlook for some time. Now more than ever, the question for investors and asset managers is how to chart the best course through these unprecedented times and beyond by selecting the most appropriate assets and investments.
Covid-19
The Covid-19 outbreak has become the world’s leading threat, placing additional stress on a weakened financial system, and upending financial norms and life as we know it. Central banks and governments around the world have responded to this issue head on, with a financial response on an extraordinary scale led by a raft of unscheduled rate cuts.
On top of this, central banks and governments globally are injecting trillions of dollars into their economies – far in excess of the levels seen in response to the Global Financial Crisis in 2008. But these historic actions to maintain the flow of credit, in the hope of limiting the damage to the economy, could profoundly distort asset prices and allocations in the years to come.
These concerns were highlighted by a recent survey commissioned by the World Gold Council and conducted by Pensions Age, which found that two-thirds (67 per cent) of respondents agreed that they were deeply concerned about the future of the global economic and financial system.1
Pensions funds face challenges
Questions around the challenges pension funds are facing, and their ability to meet their long-term liabilities, have been swirling for some time. As people live longer and spend more time in retirement, pension schemes have seen their liabilities grow relative to their assets. According to the SkyVal index, UK defined benefit schemes had a £290 billion shortfall at the end of March 2020.2
Heightened volatility – a prevalent feature of 2020 so far – also presents a risk for pension schemes looking to achieve their funding target and manage their costs. The low/negative interest rate environment, which has depressed yields on bonds, has inflated future liabilities. As such, pension schemes have been forced to search for returns greater than those from traditional assets, often in illiquid investments that can carry higher risk.
The role of gold
In the face of these challenges, pension schemes need ways to not just manage risk but minimise it – and this is where gold might play an instrumental role. This is reflected in the survey where nearly half (47 per cent) of respondents agreed that gold helps to decrease the risk within a portfolio.
Gold historically benefits from flight-to-quality inflows during periods of heightened risk. By providing positive returns and reducing portfolio losses, gold has been an effective diversifier during times of systemic crisis when investors tend to withdraw from equities. The large and liquid market for gold means it can be sold to meet liabilities while the values of less liquid assets correct. The greater a downturn in stocks and other risk assets, the more negative gold’s correlation to these assets becomes.
But gold’s correlation doesn’t only work in investors’ favour during periods of turmoil. Due to its dual nature as an adornment and an investment, gold’s long-term price trend is supported by income growth.
Only 28 per cent of respondents disagreed that gold delivers poor returns over the long-term, with 48 per cent holding no view. In fact, its price, measured in pound sterling, has increased by an average 11.6 per cent per year since 1971 when it began to be freely traded following the end of Bretton Woods. And it has outperformed many stock, bond and commodity indices over multiple periods since then. This is even more significant given gold does not pay a coupon or dividend because, as a hard currency, it carries no credit risk.
Gold’s price performance is a result of its multiple sources of demand. Gold is used by investors to protect and enhance wealth over the long-term, and it is no one’s liability. It is also sought after as an adornment, valued by jewellery buyers across the world. And it is a key component in electronics. These diverse sources of demand, combined with its relative scarcity, give gold a resilience: the potential to deliver returns in good times and in bad.
Like any investment, an allocation in gold is not risk-free. Its value will fluctuate in the short-term, and potentially more so than other assets. But over the long-term, its volatility has averaged 16-17 per cent, significantly less than other traditional assets such as equities or bonds
Gold goes beyond commodities
Another common belief amongst investors and investment practitioners alike is that gold is just a component of the broader commodity complex. Two-thirds (68 per cent) of survey respondents agreed they viewed gold as a subset of commodities.
While gold undoubtedly shares some similarities with commodities, a very cursory look at the make-up of supply and demand highlights that differences outnumber similarities. For example, the supply of gold comes from both mining and recycled sources, helping to quell uncertainty and volatility, while gold is not consumed like typical commodities because gold is virtually indestructible.
Gold’s unique attributes set it apart from the commodity complex. From an empirical perspective, including a distinct allocation to gold has been shown to improve the performance of portfolios with passive commodity exposures.
Gold & ESG
Respondents overwhelmingly agreed (85 per cent) that environmental, social and governance (ESG) issues are now decisive in shaping asset selection or strategies. This is in line with wider societal expectations but also driven by a host of legal and regulatory changes. In September of 2019, UK pension trustees became obliged to have a strategy recognising ESG factors, including climate change, as ‘financially material’ considerations. The following month, regulations were introduced requiring pension schemes with more than 100 members to disclose an understanding of the potential impacts on their investments from ESG-related risks.
The moves towards an increased understanding of this wider set of risks, and actions to mitigate their negative impacts, have also been key factors shaping the evolution of the gold supply chain, and gold’s developing role as a portfolio and risk mitigation asset.
To ensure that gold is produced sustainably and responsibly, key market participants across the supply chain have evolved a range of industry initiatives and standards to give investors greater confidence in the provenance of gold as a responsibly sourced asset.
Most recently, the World Gold Council launched the Responsible Gold Mining Principles, a comprehensive framework that sets out clear expectations for consumers, investors and the downstream gold supply chain as to what constitutes responsible gold mining.3 Independent validation of company conformance will provide further confidence to investors that the gold production process adheres to high ESG standards, reinforced by external assurance on performance, which should help minimise the risk of ‘greenwashing’.
But of all ESG risks, perhaps the most substantial and urgent are those relating to climate change. There is strong evidence that gold can play a constructive role in contributing to the mitigation of climate-related risks and support greater resilience in investment portfolios in the face of potentially destructive climate impacts. Gold has a comparatively low emissions profile and immaterial downstream impacts, potentially reducing the overall carbon footprint for an investment portfolio.4
Conclusion
The challenges and risks facing pension schemes have been mounting for some time. And this has only been exacerbated by the events of 2020 so far. But while pension schemes may be fully cognisant of these risks, they may not be fully aware of the assets which can help.
Gold’s unique portfolio characteristics, which set it apart from other mainstream assets and commodities, could be well suited to help manage those risks going forward.
Footnotes
1 The survey was conducted between 24th February and 10th March 2020, with over 100 respondents covering consultants, trustees, pensions managers, and asset managers.
I recently had a great discussion with Alex Shahidi, Managing Partner and Co-Chief Investment Officer at ARIS Consulting and Evoke Wealth and Asset TV’s Jenna Dagenhart.
We covered the drivers of gold ETF momentum, the potential impact of varying recovery paths on gold performance and outlook for the remainder of 2020.
You can explore firsthand how various macroeconomic scenarios may impact gold’s implied performance with Qaurum, our web-based quantitative tool. For more on our Gold mid-year outlook 2020, click here.
This week, LGIM announced that it would be reopening its UK commercial property fund in October.1 Investors in UK commercial property funds – those available to retail investors have close to £13bn in AUM – have seen their investment stuck, or “gated” since March. And, so far at least, most UK property remain closed to investor withdrawals, highlighting the liquidity risk that comes with investments such as these. Questions have also been raised on whether such illiquid funds should be marketed to retail investors at all.
Material uncertainty
After the upheaval caused by the COVID-19 pandemic, uncertainty has become the norm for investors and fund managers. As the UK property market – both residential, commercial – came to a standstill earlier this year, the absence of activity led to challenges in valuing property investments with the certainty required. As a result, property funds suspended withdrawals by investors. And until more normal levels of property market activity are seen, investors may continue to struggle to access their capital.
There is also uncertainty on the future of the commercial property market, even after the pandemic has passed. Working from home has become established practice over the last six months, leading to questions around the long-run role of offices. In August, Schroders announced that working from home and flexible working for its employees would become permanent.2 Decisions such as this will likely have significant implications on the value of property investments going forward.
Illiquidity risk
This highlights the illiquidity inherent in some investments. Commercial property funds have been a mainstay in many investment portfolios over the last 25 years, providing a steady income distribution stream and capital appreciation. However, during times of severe economic stress, demand for commercial property is negatively affected. As increasing numbers of investors try to withdraw their holdings, it is often difficult to sell the underlying assets to meet demand thus leading to property fund managers "gating" the fund. In the meantime, the asset values of the fund may fall further without the individual investor being able to liquidate their position.
An opportunity for gold?
We feel this could present an opportunity for gold. As we highlight in our strategic case for gold, there are three key attributes which could help investors who have an exposure to for illiquid investments:
Return: gold has been shown to generate returns in both good times and bad. So, in times of economic expansion, gold will positively add to portfolio performance. But, crucially, in times of economic contraction, gold will act as a ballast and protect wealth.
Correlation: real estate investments may be more positively correlated with other portfolio assets – such as equities. During the global financial crisis in 2008-2009, alternative assets such as real estate – often considered diversifiers – fell along with other assets, whereas gold did not.
Liquidity: the gold market is large and highly liquid. We estimate that physical gold holdings by investors and central banks are worth approximately £2.7 trillion, with an additional £700 billion in financial market instruments such as derivatives. In stark contrast to many financial markets, gold’s liquidity does not dry up, even at times of acute financial stress.
Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. In these instances, when liquidity may fall for other investments, gold can act as a genuine diversifier over the long term.
John Reade joins UBP’s recent webinar on The Strategic Case for Gold
John Reade
Senior Market Strategist World Gold CouncilOur Chief Market Strategist, John Reade recently joined Norman Villamin and Peter Kinsella from UBP for a webinar on the strategic case for owning gold.
Watch as they discuss the key characteristics of gold, whether the recent gold rush is justified, the outlook for gold and more.
Webinar: Risk, Volatility and Liquidity in Today's Institutional Portfolios
Juan Carlos Artigas
Regional CEO (Americas) and Global Head of Research World Gold CouncilI took part in the Institutional Investor forum 'Be Careful What You Wish For - When Volatility Becomes Your Frenemy: Risk, Volatility and Liquidity in Today's Institutional Portfolios' last week.
Max Giolitti, Chief Risk Officer at Verus, moderated the conversation asking very insightful questions. We discussed the current environment for gold and the outlook for the rest of 2020 around price performance, investment demand and monetary policy implications
Our conversation was followed by an investors' panel featuring John Lewis, Director of Investment Operations and Risk Management at Annie E. Casey Foundation, Beau Smith, Senior Risk Manager at Maryland State Retirement and Pension System, and James Nield, Head of Risk at Texas Teachers Retirement.
Webinar: Gold amid a global pandemic
World Gold Council
The experts on goldWe recently hosted a webinar for professional investors in which we discussed the impact of COVID-19 on gold, key Q2 and H1 2020 findings from our recently published Gold Demand Trends report and the outlook ahead for 2020.
Watch the presentation and conversation below between Claire Lincoln (Head of Sales EMEA), Matthew Mark (Head of Sales Americas) and Juan Carlos Artigas (Head of Research).
Going for gold
Krishan Gopaul
Senior Analyst, EMEA World Gold CouncilIn this Pensions Age article, I explore the question; two-thirds of pension funds are deeply concerned about the future of the global economic and financial system: How might gold help?
Even before the Covid-19 global pandemic and its seismic impact, deep-seated concerns about the health of the global economy, historically low or negative interest rates, and geopolitical uncertainty have weighed heavily on investors’ and asset managers’ outlook for some time. Now more than ever, the question for investors and asset managers is how to chart the best course through these unprecedented times and beyond by selecting the most appropriate assets and investments.
Covid-19
The Covid-19 outbreak has become the world’s leading threat, placing additional stress on a weakened financial system, and upending financial norms and life as we know it. Central banks and governments around the world have responded to this issue head on, with a financial response on an extraordinary scale led by a raft of unscheduled rate cuts.
On top of this, central banks and governments globally are injecting trillions of dollars into their economies – far in excess of the levels seen in response to the Global Financial Crisis in 2008. But these historic actions to maintain the flow of credit, in the hope of limiting the damage to the economy, could profoundly distort asset prices and allocations in the years to come.
These concerns were highlighted by a recent survey commissioned by the World Gold Council and conducted by Pensions Age, which found that two-thirds (67 per cent) of respondents agreed that they were deeply concerned about the future of the global economic and financial system.1
Pensions funds face challenges
Questions around the challenges pension funds are facing, and their ability to meet their long-term liabilities, have been swirling for some time. As people live longer and spend more time in retirement, pension schemes have seen their liabilities grow relative to their assets. According to the SkyVal index, UK defined benefit schemes had a £290 billion shortfall at the end of March 2020.2
Heightened volatility – a prevalent feature of 2020 so far – also presents a risk for pension schemes looking to achieve their funding target and manage their costs. The low/negative interest rate environment, which has depressed yields on bonds, has inflated future liabilities. As such, pension schemes have been forced to search for returns greater than those from traditional assets, often in illiquid investments that can carry higher risk.
The role of gold
In the face of these challenges, pension schemes need ways to not just manage risk but minimise it – and this is where gold might play an instrumental role. This is reflected in the survey where nearly half (47 per cent) of respondents agreed that gold helps to decrease the risk within a portfolio.
Gold historically benefits from flight-to-quality inflows during periods of heightened risk. By providing positive returns and reducing portfolio losses, gold has been an effective diversifier during times of systemic crisis when investors tend to withdraw from equities. The large and liquid market for gold means it can be sold to meet liabilities while the values of less liquid assets correct. The greater a downturn in stocks and other risk assets, the more negative gold’s correlation to these assets becomes.
But gold’s correlation doesn’t only work in investors’ favour during periods of turmoil. Due to its dual nature as an adornment and an investment, gold’s long-term price trend is supported by income growth.
Only 28 per cent of respondents disagreed that gold delivers poor returns over the long-term, with 48 per cent holding no view. In fact, its price, measured in pound sterling, has increased by an average 11.6 per cent per year since 1971 when it began to be freely traded following the end of Bretton Woods. And it has outperformed many stock, bond and commodity indices over multiple periods since then. This is even more significant given gold does not pay a coupon or dividend because, as a hard currency, it carries no credit risk.
Gold’s price performance is a result of its multiple sources of demand. Gold is used by investors to protect and enhance wealth over the long-term, and it is no one’s liability. It is also sought after as an adornment, valued by jewellery buyers across the world. And it is a key component in electronics. These diverse sources of demand, combined with its relative scarcity, give gold a resilience: the potential to deliver returns in good times and in bad.
Like any investment, an allocation in gold is not risk-free. Its value will fluctuate in the short-term, and potentially more so than other assets. But over the long-term, its volatility has averaged 16-17 per cent, significantly less than other traditional assets such as equities or bonds
Gold goes beyond commodities
Another common belief amongst investors and investment practitioners alike is that gold is just a component of the broader commodity complex. Two-thirds (68 per cent) of survey respondents agreed they viewed gold as a subset of commodities.
While gold undoubtedly shares some similarities with commodities, a very cursory look at the make-up of supply and demand highlights that differences outnumber similarities. For example, the supply of gold comes from both mining and recycled sources, helping to quell uncertainty and volatility, while gold is not consumed like typical commodities because gold is virtually indestructible.
Gold’s unique attributes set it apart from the commodity complex. From an empirical perspective, including a distinct allocation to gold has been shown to improve the performance of portfolios with passive commodity exposures.
Gold & ESG
Respondents overwhelmingly agreed (85 per cent) that environmental, social and governance (ESG) issues are now decisive in shaping asset selection or strategies. This is in line with wider societal expectations but also driven by a host of legal and regulatory changes. In September of 2019, UK pension trustees became obliged to have a strategy recognising ESG factors, including climate change, as ‘financially material’ considerations. The following month, regulations were introduced requiring pension schemes with more than 100 members to disclose an understanding of the potential impacts on their investments from ESG-related risks.
The moves towards an increased understanding of this wider set of risks, and actions to mitigate their negative impacts, have also been key factors shaping the evolution of the gold supply chain, and gold’s developing role as a portfolio and risk mitigation asset.
To ensure that gold is produced sustainably and responsibly, key market participants across the supply chain have evolved a range of industry initiatives and standards to give investors greater confidence in the provenance of gold as a responsibly sourced asset.
Most recently, the World Gold Council launched the Responsible Gold Mining Principles, a comprehensive framework that sets out clear expectations for consumers, investors and the downstream gold supply chain as to what constitutes responsible gold mining.3 Independent validation of company conformance will provide further confidence to investors that the gold production process adheres to high ESG standards, reinforced by external assurance on performance, which should help minimise the risk of ‘greenwashing’.
But of all ESG risks, perhaps the most substantial and urgent are those relating to climate change. There is strong evidence that gold can play a constructive role in contributing to the mitigation of climate-related risks and support greater resilience in investment portfolios in the face of potentially destructive climate impacts. Gold has a comparatively low emissions profile and immaterial downstream impacts, potentially reducing the overall carbon footprint for an investment portfolio.4
Conclusion
The challenges and risks facing pension schemes have been mounting for some time. And this has only been exacerbated by the events of 2020 so far. But while pension schemes may be fully cognisant of these risks, they may not be fully aware of the assets which can help.
Gold’s unique portfolio characteristics, which set it apart from other mainstream assets and commodities, could be well suited to help manage those risks going forward.
Footnotes
1 The survey was conducted between 24th February and 10th March 2020, with over 100 respondents covering consultants, trustees, pensions managers, and asset managers.
2 www.pwc.co.uk/press-room/press-releases/uk-pension-funding-volatile-over-first-quarter-of-2020.html
3 www.gold.org/about-gold/gold-supply/responsible-gold/responsible-gold-mining-principles
4 www.gold.org/goldhub/research/gold-and-climate-change-current-and-future-impacts
Asset TV interview: Mid-Year Outlook
Joseph Cavatoni
Senior Market Strategist, North America World Gold CouncilI recently had a great discussion with Alex Shahidi, Managing Partner and Co-Chief Investment Officer at ARIS Consulting and Evoke Wealth and Asset TV’s Jenna Dagenhart.
We covered the drivers of gold ETF momentum, the potential impact of varying recovery paths on gold performance and outlook for the remainder of 2020.
You can explore firsthand how various macroeconomic scenarios may impact gold’s implied performance with Qaurum, our web-based quantitative tool. For more on our Gold mid-year outlook 2020, click here.
The role of gold in a volatile world
Charles Crowson
Former macro portfolio manager and authorLombard Odier CIO viewpoint: The case for holding gold
Stéphane Monier
Chief Investment Officer Lombard Odier Private BankCan you readily access your capital investment when you need it most?
Krishan Gopaul
Senior Analyst, EMEA World Gold CouncilThis week, LGIM announced that it would be reopening its UK commercial property fund in October.1 Investors in UK commercial property funds – those available to retail investors have close to £13bn in AUM – have seen their investment stuck, or “gated” since March. And, so far at least, most UK property remain closed to investor withdrawals, highlighting the liquidity risk that comes with investments such as these. Questions have also been raised on whether such illiquid funds should be marketed to retail investors at all.
Material uncertainty
After the upheaval caused by the COVID-19 pandemic, uncertainty has become the norm for investors and fund managers. As the UK property market – both residential, commercial – came to a standstill earlier this year, the absence of activity led to challenges in valuing property investments with the certainty required. As a result, property funds suspended withdrawals by investors. And until more normal levels of property market activity are seen, investors may continue to struggle to access their capital.
There is also uncertainty on the future of the commercial property market, even after the pandemic has passed. Working from home has become established practice over the last six months, leading to questions around the long-run role of offices. In August, Schroders announced that working from home and flexible working for its employees would become permanent.2 Decisions such as this will likely have significant implications on the value of property investments going forward.
Illiquidity risk
This highlights the illiquidity inherent in some investments. Commercial property funds have been a mainstay in many investment portfolios over the last 25 years, providing a steady income distribution stream and capital appreciation. However, during times of severe economic stress, demand for commercial property is negatively affected. As increasing numbers of investors try to withdraw their holdings, it is often difficult to sell the underlying assets to meet demand thus leading to property fund managers "gating" the fund. In the meantime, the asset values of the fund may fall further without the individual investor being able to liquidate their position.
An opportunity for gold?
We feel this could present an opportunity for gold. As we highlight in our strategic case for gold, there are three key attributes which could help investors who have an exposure to for illiquid investments:
Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. In these instances, when liquidity may fall for other investments, gold can act as a genuine diversifier over the long term.
Footnotes
1www.investmentweek.co.uk/news/4020277/lgim-lift-suspension-uk-property-fund
2www.thetradenews.com/schroders-announces-permeant-work-from-home-scheme/