Authored by Jeremy De Pessemier, Asset Allocation Strategist, and Ray Jia, Senior Analyst.
Summary
Amid economic uncertainty Australian investors have, so far this year, been reallocating to fixed income assets
Although currently attractive, persistent inflationary pressure can bring risks to both the growth outlook and return for these assets
Gold should be considered as a long-term strategic asset alongside bonds as it provides excellent returns in a wide range of economic scenarios.
Aussie investors rolled into safer assets
Reassured by the resilience in macro data but frustrated that inflation isn’t falling fast enough, major central banks have continued their monetary tightening, in some cases coming back to it after a brief hiatus. And as the lagged impact of these aggressive rate hikes ripples through the economy, the broad trend remains for slowing growth in the back half of the year.
From May last year till now, the Reserve Bank of Australia (RBA) has lifted its policy rate by 4% to 4.1% to tame inflation. And as the RBA reiterated in its September policy meeting, Australia may continue to experience the below-trend growth in the future, as cost-of-living pressures and the rise in interest rates continue to weigh on domestic demand.
With the balance of economic forces tilted against capital markets, investors have been rushing out of risk assets into safer ones (Chart 1). According to Calastone, equity, multi asset and property funds saw major outflows throughout H1 2023, while fixed income funds added A$1.3bn. In addition, there were signs of investors flocking to cash after rolling out of riskier assets.
Chart 1: Australian investors are fastening their seatbelts*
*As of 30 June 2023
Source: Calastone, World Gold Council
Bonds are attractive but gold is an excellent complementary asset
Fixed income assets currently seem like an attractive choice for investors. The sharp rise in bond yields since early 2022 and the rising possibility of rates peaking soon (Chart 2), after another rate pause in August, have improved the return potential in many fixed income sectors. And while flat to inverted yield curves make it less compelling to extend duration, a modest increase in duration could be prudent for investors seeking to hedge against a growth shock.
Chart 2: Investors are expecting lower rates than previous projections
Implied rates of Australian cash rate futures *
*As of 31 August 2023
Source: Bloomberg, World Gold Council
But there are risks associated with this view. Persistent inflationary pressure remains the primary obstacle to monetary easing and could even result in further tightening. Moreover, inflation volatility may be just one part of the medium-term inflation story. In fact, looking at the US experience, where we have data going back to 1870, inflation has tended to reappear in echoing waves at two and five years after it first spiked above 7% (Chart 3).
And the combination of short- to mid-term factors – such as surging unit labour costs and a tight rental market – as well as longer-term impacts from the green transition, deglobalisation and geopolitical uncertainties, indicate an environment in which there could be more frequent inflation shocks. And the RBA also stressed in its latest policy meeting that sticky service inflation and the lag of monetary policy’s impact could also provide fuel for inflation to rebound.
Chart 3: Inflation cycle in the US since 1870
US inflation experienced multiple bounces after the first spike above 7%
*Based on monthly US CPI y/y growth between January 1872 and June 2023.
Source: Bloomberg, World Gold Council
Such an environment would require ongoing and fairly dramatic adjustments to monetary policy from the RBA, which in turn could introduce volatility, potentially below-trend growth and the possibility of negative returns in Australian fixed income allocations.
Against this backdrop there are advantages to diversifying the sources of safety in an investment portfolio beyond just high-quality government bonds:
Gold is a global asset: its diverse sources of demand make it resilient and give it the potential to deliver solid returns in various market conditions (Chart 4).
Following a strong 2022 (+7%), gold in AUD capped another gain of over 12% during the first eight months of 2023, once again outrunning other major assets.
Chart 4: Gold and bonds can together be a potent portfolio diversification strategy
Returns from equities, bonds and gold during negative quarterly GDP growth in Australia, 1985 to 2023
*Data from Q4 1985 to Q2 2023. Based on LBMA Gold Price PM, Bloomberg AusBond Composite Index and MSCI Australia Index. All calculation in AUD.
Source: Bloomberg, World Gold Council
Gold is an effective hedge against stagflation: stubborn inflation and slowing growth often herald the risk of stagflation.
And historically during such periods, gold in AUD has delivered a stunning 27% annual average return, significantly outperforming other assets.1
These characteristics underscore our belief that gold has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio alongside equities and bonds. Looking ahead, gold and government bonds are likely to perform differently. That feature alone should appeal to investors, particularly those of Self-Managed Super Funds, and could be key to managing the potential risks ahead.
Both the volatility and yields of Japanese Government Bonds (JGBs) rose, driven by intensifying expectations that the end of the Bank of Japan’s (BoJ) negative interest rate policy is nearing
While JGBs remain a key strategic asset in local investors’ portfolios, we believe gold could be an effective supplement against the current backdrop
Our analysis shows a 5% gold allocation could help improve the performance of a Japanese portfolio that invests in bonds and equities
Expectations for the end of the BoJ’s negative policy rate intensified
The BoJ relaxed its yield curve control (YCC) program in late July. Governor Ueda’s first surprise move since taking the wheel: he effectively doubled the YCC’s upper limit to 1%, while keeping the policy rate unchanged at -0.1%.1 This led to surges in both the 10-year JGB yield and its volatility (Chart 1).
Chart 1: JGBs are becoming more volatile*
Source: Bloomberg, World Gold Council
*As of the week ending 8 September 2023.
And last weekend, Ueda noted that should prices and wages continue to rise by the year-end, ending the BOJ’s negative interest rate policy is among the options available.2 As a result, the 10-year JGB yield soared and investors’ expectations of a pivot in the BOJ’s current ultra-easing monetary policy intensified (Chart2).
Japanese OIS implied policy rate, 8 September vs 8 August vs 7 July
Source: Bloomberg, World Gold Council
JGBs felt the pain. Surging JGB yields have suppressed their prices, leading to a lousy performance so far in 2023 (Chart 3). And during the recent three months, Japanese bonds’ weaknesses were far more apparent, suffering a decline of over 2%. With interest rates’ upside potential unlocking, JGBs’ downside price risk may negatively impact local portfolios.
Chart 3: JGBs’ y-t-d gain narrowed significantly while gold in yen delivered a robust return*
Source: Bloomberg, World Gold Council
*Based on the TOPIX Real Estate Index, LBMA Gold Price PM, MSCI World Index, Bloomberg Commodity Index, Bloomberg Barclays Global Agg Index, Bloomberg Barclays US Agg Index, Bloomberg Barclays JGBs Index. As of August 2023, all calculations are in yen.
JGBs are important assets in portfolios, gold is an effective complement
That being said, there is no denying that bonds play a vital role in many Japanese investor portfolios. For life insurance asset managers, bonds are key to match their liability durations. For others, bonds are safe-haven assets that can help reduce overall portfolio volatility. And for some, the rising yields of JGBs mean more attractive holding-to-maturity gains.
But this latest action from the BoJ may undermine the role of JGBs as a safe-haven asset. The rolling one-year correlation between 10-year JGBs and Japanese equities is at its highest for decades (Chart 4). One of the key reasons is investor expectation of further policy normalisation from the BoJ, which would push up bond yields and weigh on equities – as is usual when interest rates rise.
And should inflation pressure persist – and continue to beat expectations – JGBs may see higher volatilities in its price and yield, both from a potential acceleration in the BoJ’s policy normalisation moves and higher nominal yields.
Chart 4: The correlation between JGBs and local equities rose to its highest in decades
52-week rolling correlation between 10-year JGBs and Nikkei 225*
Source: Bloomberg, World Gold Council
*Based on weekly returns. As of 8 September 2023.
Gold, as a non-JPY asset and a hedge against risks, is an effective supplement to Japanese portfolios. We created a hypothetical portfolio equally divided into global equities, domestic equities, global bonds and domestic bonds. We then compared the performance of this portfolio with two other hypothetical portfolios: one with an additional 5% allocation to bonds and one with a 5% allocation to gold (proportionally reducing the allocation to other asset classes) (Chart 5).
Chart 5: Three hypothetical portfolios
Source: World Gold Council
Comparing the performance metrics of the three portfolios over various time periods showed that:
Adding more bonds to a portfolio that already includes fixed-income assets will reduce the overall volatility further, but will also supress returns
Adding gold to the equally invested portfolio not only improves its return, it also lowers the portfolio’s risk; this has been particularly evident over the past five years.
Chart 6: Adding gold to a portfolio that already invests in bonds improves return and lowers risks
Performance of the three hypothetical portfolios over different time periods*
Source: Bloomberg, World Gold Council
*Based on the Bloomberg Barclays JGB Index, Nikkei 225 Index, Bloomberg Barclays Global Agg Index, MSCI World Index and LBMA Gold Price PM and weights in Chart 5. All calculations in yen, as of August 2023.
Summary and outlook
Gold’s independence from Japan’s economy and monetary policies, as well as its stable supply and demand dynamics, have rewarded investors with effective risk-hedging and long-term returns. For instance, gold, in yen, has delivered a stunning 17% return during the first eight months of 2023 (Chart 3) outperforming major assets, following a 16% gain in 2022. And in our 2023 Mid-year Gold Outlook we noted that in the market consensus economic scenario, gold’s performance in 2023 is likely to be in line with its long-term return.
As our above analysis shows, the inclusion of gold in a JPY portfolio already investing in bonds could help improve its performance whilst reducing volatilities further. We believe this, together with lucrative returns in JPY, could make gold an effective complement to JGBs for Japanese investors.
We’re delighted to contribute another thought-leader article published in Financial Investigator’s highly regarded magazine. In their September issue, we review the notion that whilst bonds may be en vogue, gold never goes out of style. The article supports our ongoing belief that gold has a key role to play as a strategic long-term investment and mainstay allocation within a well-diversified portfolio.
Summary
Amid economic uncertainty, European investors have been, so far this year, reallocating to fixed income assets
While fixed income assets may seem attractive currently, persistent inflationary pressures can bring risks to both the growth outlook and bond returns
Gold should be considered as a long-term strategic asset alongside bonds as it provides excellent returns in a wide range of economic conditions
Macroeconomic outlook
Reassured by the resilience in macro data, and frustrated that inflation isn’t falling fast enough, major central banks have continued with the monetary tightening exercise, in some cases coming back to it after a brief pause. And as the lagging impact of their aggressive rate hikes ripples through the economy, the broad trend remains for slowing growth in the back half of the year.
In the eurozone, the European Central Bank (ECB) has lifted interest rates by 4.5% since July last year, back to the highest ever level of 4%, to tame inflation. And while headline inflation is now well off October’s 10.6% year-on-year (y-o-y) peak, dropping to 5.2% y-o-y in August, there is no denying that the pace of growth is decelerating (Chart 1). Indeed, the cost-of-living pressures and the rise in interest rates are weighing on domestic demand.
Chart 1: inflation is cooling, but still above target, and growth is slowing
*As of 31st July 2023 Source: Bloomberg, Eurostat, World Gold Council
With the balance of economic forces tilted against capital markets, investors have been reallocating into safer assets recently. According to Refinitiv’s European Fund Flow Report, fixed income funds saw the largest inflows (€18bn) in June while equity and multi-asset funds faced outflows. The flow pattern for June has cemented the year-to-date trend; i.e. fixed income funds were the asset type with the highest estimated net inflows overall for 2023 so far.
Bonds are attractive, gold looks good as a complementary asset
Fixed income assets do seem like an attractive choice for investors currently. The sharp rise in bond yields since early 2022 and the possibility of rates peaking soon (Chart 2) have improved the return potential in many fixed income sectors. And while inverted yield curves make it less compelling to extend duration, a modest increase in duration could be prudent for investors seeking to hedge against a growth shock.
Chart 2: Investors are expecting lower rates compared to previous projections
Eurozone implied future cash rates*
*As of 11 August 2023. Source: Bloomberg, World Gold Council
But there are risks associated with this view. Persistent inflationary pressures remain the primary obstacle to monetary easing and could result in further tightening. Moreover, inflation volatility may be part of the medium-term inflation story. In fact, looking at the US experience where we have data going back to 1870, inflation has tended to see echo waves two and five years after its first spike above 7% (Chart 3).
Chart 3: Inflation cycle in the US since the 1870’s
US inflation experienced, on average, multiple bounces after the first spike above 7%*
*Data from January 1872 to December 2022. Source: Robert Shiller CAPE ratio data, World Gold Council
And the combination of high wage growth, the green transition, deglobalisation and geopolitical uncertainties speaks to an environment of more frequent potential shocks to inflation. Such an environment would require ongoing and fairly dramatic adjustments to monetary policy from the ECB, introducing volatility, potentially below trend growth and the possibility of negative returns in euro fixed income allocations.
Against this backdrop, there are several advantages to diversifying the sources of safety in an investment portfolio beyond just high-quality government bonds. Indeed, gold is a global asset and its diverse sources of demand give it resilience and the potential to deliver solid returns in various market conditions. For instance, following a strong 2022 (+6% in EUR), in which gold outperformed both global equities and eurozone government bonds, the precious metal has delivered another gain of 4.4% during the first seven months of 2023, once again outperforming eurozone government bonds.
Furthermore, Chart 4 highlights that gold can not only be particularly effective in times of high inflation, it can also help during challenging equity markets. While effective diversifiers are sometimes hard to find, with many assets becoming increasingly correlated as market uncertainty rises, gold is different in that its negative correlation to equities and other risk assets, as seen in Chart 4, increases as these assets sell off.
Chart 4: Gold can be an effective addition to a portfolio
a. Gold historically performs well in periods of high inflation
b. Correlation of global equities vs gold and German Bunds in various market environments
*Chart a: inflation computed using annual euro CPI y-o-y changes between 1975 and 2022. **Chart b: based on weekly returns of the FTSE Global Developed Equity Index, ICE BofA German Government bond Index and the LBMA Gold Price. Data from 31 December 1993 to 30 December 2022. Source: Bloomberg, ICE Benchmark Administration, World Gold Council
These combined characteristics underscore why we believe gold has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio, alongside equities and bonds. Going forward, it is likely that gold and government bonds will perform differently from one another. This feature alone should appeal to investors tasked with managing the potential risks ahead.
Determining the value of gold can at times make potential investors hesitant. Unable to judge what the price might do, reduces confidence in making an informed decision. Recently, gold in Australian Dollars (AUD) reached its highest ever price and breached A$3,000. While dipping slightly by the end of the first half of 2023, when is the right time to buy, or even increase, a gold allocation into a portfolio?
The global gold market is valued in US Dollars (USD). Gaining insight into such aspects as US real rates and the strength of the USD can help indicate what the price might do in the short to medium term. However, the gold market is much deeper and broader than just these two factors. Its demand is boosted by both economic growth and uncertainty. Since gold is a global asset, demand tailwinds from one region may counteract headwinds from another. These counterfactors pose their own challenges but also give gold its core characteristics as a unique investment.
Influencers of the gold price
Without interest or dividends, typical discounted cash flow models fail when assessing gold. So too do other valuation tools often used for shares and bonds. Gold does not have any expected earnings or book-to-value ratios. But there is a good reason why it does not pay a coupon: with no issuer; it carries no credit risk. Its price is determined by the intersection of demand and supply, (with Australia being one of the world’s largest suppliers). Understanding these drivers, can give more assurance into what determines performance.
*Based on 10-year average annual net demand estimates ending in 2022. Includes: jewellery and technology net recycling, in addition to bars and coins, ETFs and central bank demand which are historically reported on a net basis. It excludes Over-The-Counter demand owing to limitations in data availability.**Net jewellery and technology demand computed assuming 90% of annual recycling comes from jewellery and 10 from technology. Source: Metal Focus, Refinitiv GFMS, WorldGold Council. Latest Gold Demand Trends can be found on goldhub.com
There is often a misconception that positive economic growth is bad for gold. The recent inflation figures from both the RBA (4.9%)1, and the Fed (3%)2, as well as other major economies has been encouraging. Consumer Price Indices (CPI) appear to be moving in the right direction. Should this continue, there may be talk around the potential of rates decreasing to help kickstart local economies, and thereby enhance consumer spending. As almost half (44%) of gold’s demand originates from the jewellery and technology sectors, economic improvement generally results in increased appetite for such items. This is where regional demand tailwinds are relevant. Consumer demand, while global, is heavily weighted towards China and India who account for over half of jewellery demand.
Investment demand (38%) can over the short term, exert strong pressure on gold’s price. This type of tactical demand from physical markets, exchange-traded securities and over-the-counter (OTC) products has historically experienced increases during periods of economic and political uncertainty, and falls as confidence grows. As gold is one of the most active daily traded assets, there is a tendency to suggest that it is highly volatile. Yet, in reality, over the medium to long-term, it is less volatile than Australian Real Estate Investment Trusts, and on par with the ASX 200.
Data as of 30 June 2023. Sources: Bloomberg, CBOE, COMEX, World Gold Council; More information and comparisons available on goldhub.com
Central Banks account for almost a fifth (18%) of gold demand to help diversify reserves. In the past, many have been forced to print more money, this increase in supply, while helping to stave off economic turmoil, carries the cost of devaluing the currency. Gold, by contrast, is a finite physical commodity whose supply can’t easily be added to. It is a natural hedge against inflation.
But it’s diversification that matters
All prudent investors will be mindful that protecting long-term investments is fundamental. When determining an investment strategy, questions over protection are generally focused upon;
Is the portfolio diversified enough?
Are the right defensive assets in place?
Does the portfolio have liquidity available?
There is no standard diversification model. Investment appetite, fund life stages, and personal sentiment can result in allocations varying from one portfolio to another. But, according to a recent Calastone3 report, Australian investors fled managed international equity, property and mixed asset funds at a record level during Q2 2023. Fixed income funds were the beneficiaries. Given the higher interest rate environment, this is not too surprising. Many investors look upon these products as fulfilling a traditional role of diversification, offering protection during periods when risk assets have come under pressure. In the main, fixed income products certainly help, but they are not absolute.
When inflation is below 2%, the correlation between global equities and treasuries has been negative, providing diversification. At levels above 2%, this relationship has historically started to break down4.
In summary
Understanding the broader drivers of gold’s price can improve investor confidence, and unlike some other defensive assets, gold has various demand sources, which complement the other over different economic and market conditions.
The answer to when there is a good time to buy gold depends upon the investor’s strategy and objectives. A diversified portfolio, needs the insurance over the medium to long term to help ride out unforeseen market events. Gold can help achieve that, but can also stand its ground in calmer times (if history is anything to go by). Therefore, there is never a bad time to think about the right allocation.
Over the course of this year, I have been fielding an increasing number of questions from US investors and media about owning precious metals, in particular gold, in an individual retirement account (“IRA”). When I did my own independent, online research, I found that the information available on the web can be confusing and, in many ways, misleading if not downright inaccurate. This blog is a very simple and concise summary, for anyone interested in achieving the benefits of gold in their retirement account. Read on for the facts and information that you need to know, and some guidance to assist you along the way.
Let’s start with gold as an investment. World Gold Council research shows that most portfolios can benefit from an allocation to gold. As the current market environment continues to prove quite challenging for investors and makes portfolio management difficult, our data suggests a strategic allocation to gold can provide long-term returns and lower overall portfolio volatility.
The favorable effects of a strategic allocation to gold are due to its significant level of liquidity and unique performance behavior, which is driven by both investment and consumer demand. The “dual nature” of gold as both an investment asset and a consumer good makes gold an excellent addition to a diversified portfolio and delivers long-term returns in both good and bad economic environments.
A bit about IRA’s
An IRA is a method of long-term savings that an individual can use, and it offers: the ability to save for the future, a platform for providing returns and the potential for certain tax advantages in the future. As IRAs are long-term by design, they offer an excellent platform for investors to diversify and reap the benefits of an allocation to gold.
For investors, attention to the details is necessary when making the decision to invest in gold using an IRA. To start, there are four typical types of IRA accounts as defined by the IRS:
traditional IRAs,
Roth IRAs,
Simplified Employee Pension (SEP) IRAs,
and Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
Each has different rules regarding eligibility, taxation, and withdrawals. What is not a defined account type by the IRS is a “precious metal” or “gold” IRA account, and anyone insisting you need this type of account to invest in precious metals could be misrepresenting the facts. There are no such defined terms under the Internal Revenue Code of 1986 (the “Code”). Any investor may make use of open/existing IRA accounts to make your investment. It's worth noting that some organizations might try to use these labels to “brand” their business activity, but it is not a legal structure that is different to the IRS defined accounts. The key is, your existing provider needs to confirm they are set up and ready to accept your investment.
Can I own regulated gold financial instruments in my IRA?
A simple and effective way for investors to access gold in an IRA would be to make use of the large and established physical gold-backed exchange traded funds (“ETF”) market. Section 408(m) of the Code defines what types of collectibles and precious metals can be included in an IRA. In 2004, the IRS clarified through private letter rulings that under this section, the purchase of shares of a gold ETF by the trustee or custodian of an IRA would not be treated as the acquisition of a collectible resulting in a taxable distribution to the IRA owner.
Gold ETFs are liquid, easy to access and track the gold price making them a very sensible and viable investment choice. As physical gold-backed ETFs are technically equity instruments, there are no account or trading restrictions. However, it would be sensible to confirm with your IRA trustee/custodian that you are looking to have the instrument added to your existing IRA and that they are clear on the process to make that investment through the purchase of a gold-backed ETF.
Can I own physical gold in my IRA?
Separately, an investor may choose to make an investment in gold in physical form in their IRA provided the form of physical gold qualifies under section 408(m) of the Code which requires that the gold meet certain criteria (primarily purity and liquidity requirements).
In addition to understanding the types of gold eligible through physical investment, there are other key considerations an investor will need to review before implementing an allocation to physical gold. A critical key point to address straight away is the need for your IRA trustee/custodian to provide the essential platform for investing in the physical market as not all IRA platforms permit this type of access. A client needs to ensure that their IRA trustee/custodian offers access to the appropriate forms of gold, and that they have the means/capabilities to hold the gold in custody. This is a condition that must be met to ensure the investment is in line with the IRS ruling that initially provided for the investment. Once your IRA trustee/custodian confirms that that they can offer you access to precious metals, you can gain access to gold using the various types of IRAs equally (traditional, Roth, etc.).
Once I am clear that I want to own gold and can hold gold, what should I do next?
We recommend to any individual who is interested in adding gold, either using a regulated financial instrument like an ETF or in physical form, that they should start with familiarizing themselves with our Retail Gold Investment Guidance. This framework has been designed to provide investors with five simple steps to follow and various questions to ask before any steps are taken to invest in gold.
If you are being approached by an organization that is unfamiliar to you and experience selling behaviors that include, for example, high pressured sales tactics or directives like “you need a new account, there is no other way”, realize that these are signs that you should slow down and ask more questions. Remember, you are looking at your long-term savings, and no one needs to make a hasty decision and put any of your assets at risk.
If you are pursuing this investment opportunity on your own, once you decide that you are comfortable with adding a gold allocation to your savings, you should contact your investment advisor/IRA administrator to discuss the possible options available to you.
Want to learn more about the gold market? Visit Goldhub.org
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other content is the intellectual property of the respective third party and all rights are reserved to them.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus, Refinitiv GFMS or other identified copyright owners as their source. World Gold Council is affiliated with Metals Focus.
WGC does not guarantee the accuracy or completeness of any information nor accepts responsibility for any losses or damages arising directly or indirectly from the use of this information. This information is for educational purposes only and by receiving this information, you agree with its intended purpose.
Nothing contained herein is intended to constitute a recommendation, investment advice, or offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). This information does not take into account any investment objectives, financial situation or particular needs of any particular person.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. WGC does not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information contains forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. WGC assumes no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. WGC provides no warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
Gold has gained more than 3% this week largely attributed to an escalation of geopolitical tensions linked to the Israeli-Palestinian conflict. 1
As a crisis hedge, gold has a solid history, driven by its lack of credit risk and negative correlation to risk assets. But it is likely that geopolitical tensions on their own might influence gold returns, even when accounting for the change in other factors. We set out to test this idea.
Capturing the transmission channels of geopolitical risk can be challenging. Political context, geographical concentration and the likelihood of proliferation all matter, as does whether the increase in risk comes from a perceived threat or an actual act of aggression.
Also, many historical episodes are too idiosyncratic to act as useful guides. Fortunately, a number of indices exist to quantify geopolitical risk. Arguably the most well-known is the Geopolitical Risk (GPR) index by Matteo Iacoviello that measures both actual and perceived geopolitical tension.2 The GPR index has a reliable track record of reflecting observed impacts to underlying economic variables at a global level (Chart 1).
Chart 1. The Iacoviello GPR index consistently captures historical acts and threats of geopolitical tension
We use our Gold Return Attribution Model (GRAM) to quantify the impact of key drivers on gold returns, both on monthly and weekly frequencies.3 It is an invaluable and historically accurate guide. But from time to time, the model produces a more noticeable residual. When this occurs, the likely culprit is either a missing factor or a change in the sensitivity of gold to the existing factors.
In 2022, for example, there were at least two instances of these more sizeable residuals: in Q2 and Q3. We know subsequently that there was considerable central bank buying during these quarters, and the Russian invasion of Ukraine occurred in late February – two factors that are not explicitly included in our model and are likely candidates for missing variables. We don’t currently have a reliable series to capture non-reported monthly central bank buying, but the GPR could conceivably capture the additional impact of geopolitics on gold.
This is what our analysis shows. Even though the model already includes inflation, bond yields, currencies, crude oil and implied gold volatility – variables likely to respond to a rise in geopolitical tension – the impact of the GPR index is visible,4 and it adds to the model’s explanatory power (Chart 2).
Chart 2: By adding the GPR index to GRAM, we can quantify gold’s geopolitical risk premium
Source: Bloomberg, World Gold Council
For more on GRAM see here. GPR is added as the de-meaned log of the GPR index.
The conclusion we can draw from this is that gold – likely via investor flows – responds to elevated geopolitical risk even when controlling for the movement in the existing variables in the model. And we can attach a number to this response: an increase in the GPR index by 100 units holding all else constant, has a c.2.5% positive impact on gold’s return. For example, the GPR index rose from under 100 to over 250 at the start of the Russia-Ukraine conflict last year, while 9/11 saw it spike above 450 from under 50.
GPR index spikes have in recent times been short-lived, however. This partly reflects a shorter news cycle than in the past. It does not suggest that gold’s reaction is short-lived, as the follow-through from a spike to other variables and sentiment can potentially last longer. But there is also a slight medium-term risk for gold from a rise in tensions, via higher inflation for example, which could potentially delay a gold-friendly monetary pivot by the Fed and other central banks.
In summary, gold’s performance this week is not a coincidence and can be measurably attributed to the Israeli-Palestinian conflict. How long this effect will last will depend on the wider ramifications the conflict may have on the global economy. And, in either case, given the increased frequency and unpredictability of geopolitical risks, it further supports the case for a consistent, strategic allocation to gold.
Footnotes
Based on the LBMA Gold Price PM between 6 and 12 October 2023. Gold’s performance over the period was also supported by the 20-basis point fall in US 10-year TIPS yields and a small drop in the US dollar.
Matteo Iacoviello is a Senior Associate Director of International Finance at the Board of Governors of the US Federal Reserve System.
GRAM is a multiple regression model of weekly and monthly gold price returns, comprised of approximately 15 explanatory variables which we group into four key thematic driver categories of gold’s performance: economic expansion, risk & uncertainty, opportunity cost, and momentum.
The coefficient is positive and statistically significant at the 5% level but its individual contribution is relatively small, as there are other variables that are also responding to changes in geopolitical risk, as we saw the oil price do over the weekend for example. Model R-squared increases to 0.645 from 0.635 following the inclusion of the GPR. We isolate the total impact of GPR by removing other current variables from the model.
In the opening episode of Unearthed, hosts John Reade and Joe Cavatoni – Market Strategists at World Gold Council - celebrate the launch of their new podcast, focusing on macroeconomic trends and their impact on the investment landscape.
Joined by Lori Heinel, the Global Chief Investment Officer at State Street Global Advisors, the group discuss the current market conditions, the role of central banks in addressing inflation and the potential implications of the upcoming U.S. election on investor sentiment. Heinel also shares insights on portfolio diversification strategies and the evolving trends in ETFs, including those for gold, highlighting their significance in today's economic climate.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
In this episode of the podcast, hosts John Reade and Joe Cavatoni are joined by Tina Fordham, the founder of Fordham Global Foresight. The conversation delves into the current global geopolitical climate, questioning whether recent tensions signify a long-term escalation.
They explore the implications of central banks, particularly in emerging markets, diversifying their reserves away from traditional holdings like the U.S. dollar, and whether this indicates a shift from Western dominance.
The discussion also covers the effectiveness of geopolitical risk indices, the evolving dynamics of Western relations with China, and the potential impact of the upcoming U.S. elections and other global elections in 2024. Fordham also shares her insights on critical geopolitical developments that are under the radar but warrant attention.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
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Australian investors are de-risking: bonds en vogue, but gold never goes out of style
World Gold Council
The experts on goldAuthored by Jeremy De Pessemier, Asset Allocation Strategist, and Ray Jia, Senior Analyst.
Summary
Aussie investors rolled into safer assets
Reassured by the resilience in macro data but frustrated that inflation isn’t falling fast enough, major central banks have continued their monetary tightening, in some cases coming back to it after a brief hiatus. And as the lagged impact of these aggressive rate hikes ripples through the economy, the broad trend remains for slowing growth in the back half of the year.
From May last year till now, the Reserve Bank of Australia (RBA) has lifted its policy rate by 4% to 4.1% to tame inflation. And as the RBA reiterated in its September policy meeting, Australia may continue to experience the below-trend growth in the future, as cost-of-living pressures and the rise in interest rates continue to weigh on domestic demand.
With the balance of economic forces tilted against capital markets, investors have been rushing out of risk assets into safer ones (Chart 1). According to Calastone, equity, multi asset and property funds saw major outflows throughout H1 2023, while fixed income funds added A$1.3bn. In addition, there were signs of investors flocking to cash after rolling out of riskier assets.
Chart 1: Australian investors are fastening their seatbelts*
*As of 30 June 2023
Source: Calastone, World Gold Council
Bonds are attractive but gold is an excellent complementary asset
Fixed income assets currently seem like an attractive choice for investors. The sharp rise in bond yields since early 2022 and the rising possibility of rates peaking soon (Chart 2), after another rate pause in August, have improved the return potential in many fixed income sectors. And while flat to inverted yield curves make it less compelling to extend duration, a modest increase in duration could be prudent for investors seeking to hedge against a growth shock.
Chart 2: Investors are expecting lower rates than previous projections
Implied rates of Australian cash rate futures *
*As of 31 August 2023
Source: Bloomberg, World Gold Council
But there are risks associated with this view. Persistent inflationary pressure remains the primary obstacle to monetary easing and could even result in further tightening. Moreover, inflation volatility may be just one part of the medium-term inflation story. In fact, looking at the US experience, where we have data going back to 1870, inflation has tended to reappear in echoing waves at two and five years after it first spiked above 7% (Chart 3).
And the combination of short- to mid-term factors – such as surging unit labour costs and a tight rental market – as well as longer-term impacts from the green transition, deglobalisation and geopolitical uncertainties, indicate an environment in which there could be more frequent inflation shocks. And the RBA also stressed in its latest policy meeting that sticky service inflation and the lag of monetary policy’s impact could also provide fuel for inflation to rebound.
Chart 3: Inflation cycle in the US since 1870
US inflation experienced multiple bounces after the first spike above 7%
*Based on monthly US CPI y/y growth between January 1872 and June 2023.
Source: Bloomberg, World Gold Council
Such an environment would require ongoing and fairly dramatic adjustments to monetary policy from the RBA, which in turn could introduce volatility, potentially below-trend growth and the possibility of negative returns in Australian fixed income allocations.
Against this backdrop there are advantages to diversifying the sources of safety in an investment portfolio beyond just high-quality government bonds:
Following a strong 2022 (+7%), gold in AUD capped another gain of over 12% during the first eight months of 2023, once again outrunning other major assets.
Chart 4: Gold and bonds can together be a potent portfolio diversification strategy
Returns from equities, bonds and gold during negative quarterly GDP growth in Australia, 1985 to 2023
*Data from Q4 1985 to Q2 2023. Based on LBMA Gold Price PM, Bloomberg AusBond Composite Index and MSCI Australia Index. All calculation in AUD.
Source: Bloomberg, World Gold Council
And historically during such periods, gold in AUD has delivered a stunning 27% annual average return, significantly outperforming other assets.1
These characteristics underscore our belief that gold has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio alongside equities and bonds. Looking ahead, gold and government bonds are likely to perform differently. That feature alone should appeal to investors, particularly those of Self-Managed Super Funds, and could be key to managing the potential risks ahead.
More on market perspectives: Gold Mid-year outlook 2023: Between a soft and a hard place.
Footnotes
1Based on data between 1973 and 2022, all calculations in AUD. For more please see: The relevance of gold for Australian investors in 2023 | World Gold Council
The time may be right for gold in Japanese investors’ portfolios
Ray Jia
Head of Research (Asia Pacific, ex-India) and Deputy Head of Trade Engagement (China) World Gold CouncilSummary
Expectations for the end of the BoJ’s negative policy rate intensified
The BoJ relaxed its yield curve control (YCC) program in late July. Governor Ueda’s first surprise move since taking the wheel: he effectively doubled the YCC’s upper limit to 1%, while keeping the policy rate unchanged at -0.1%.1 This led to surges in both the 10-year JGB yield and its volatility (Chart 1).
Chart 1: JGBs are becoming more volatile*
Source: Bloomberg, World Gold Council
*As of the week ending 8 September 2023.
And last weekend, Ueda noted that should prices and wages continue to rise by the year-end, ending the BOJ’s negative interest rate policy is among the options available.2 As a result, the 10-year JGB yield soared and investors’ expectations of a pivot in the BOJ’s current ultra-easing monetary policy intensified (Chart2).
Chart 2: Investors’ policy rate expectation kept rising
Japanese OIS implied policy rate, 8 September vs 8 August vs 7 July
Source: Bloomberg, World Gold Council
JGBs felt the pain. Surging JGB yields have suppressed their prices, leading to a lousy performance so far in 2023 (Chart 3). And during the recent three months, Japanese bonds’ weaknesses were far more apparent, suffering a decline of over 2%. With interest rates’ upside potential unlocking, JGBs’ downside price risk may negatively impact local portfolios.
Chart 3: JGBs’ y-t-d gain narrowed significantly while gold in yen delivered a robust return*
Source: Bloomberg, World Gold Council
*Based on the TOPIX Real Estate Index, LBMA Gold Price PM, MSCI World Index, Bloomberg Commodity Index, Bloomberg Barclays Global Agg Index, Bloomberg Barclays US Agg Index, Bloomberg Barclays JGBs Index. As of August 2023, all calculations are in yen.
JGBs are important assets in portfolios, gold is an effective complement
That being said, there is no denying that bonds play a vital role in many Japanese investor portfolios. For life insurance asset managers, bonds are key to match their liability durations. For others, bonds are safe-haven assets that can help reduce overall portfolio volatility. And for some, the rising yields of JGBs mean more attractive holding-to-maturity gains.
But this latest action from the BoJ may undermine the role of JGBs as a safe-haven asset. The rolling one-year correlation between 10-year JGBs and Japanese equities is at its highest for decades (Chart 4). One of the key reasons is investor expectation of further policy normalisation from the BoJ, which would push up bond yields and weigh on equities – as is usual when interest rates rise.
And should inflation pressure persist – and continue to beat expectations – JGBs may see higher volatilities in its price and yield, both from a potential acceleration in the BoJ’s policy normalisation moves and higher nominal yields.
Chart 4: The correlation between JGBs and local equities rose to its highest in decades
52-week rolling correlation between 10-year JGBs and Nikkei 225*
Source: Bloomberg, World Gold Council
*Based on weekly returns. As of 8 September 2023.
Gold, as a non-JPY asset and a hedge against risks, is an effective supplement to Japanese portfolios. We created a hypothetical portfolio equally divided into global equities, domestic equities, global bonds and domestic bonds. We then compared the performance of this portfolio with two other hypothetical portfolios: one with an additional 5% allocation to bonds and one with a 5% allocation to gold (proportionally reducing the allocation to other asset classes) (Chart 5).
Chart 5: Three hypothetical portfolios
Source: World Gold Council
Comparing the performance metrics of the three portfolios over various time periods showed that:
Chart 6: Adding gold to a portfolio that already invests in bonds improves return and lowers risks
Performance of the three hypothetical portfolios over different time periods*
Source: Bloomberg, World Gold Council
*Based on the Bloomberg Barclays JGB Index, Nikkei 225 Index, Bloomberg Barclays Global Agg Index, MSCI World Index and LBMA Gold Price PM and weights in Chart 5. All calculations in yen, as of August 2023.
Summary and outlook
Gold’s independence from Japan’s economy and monetary policies, as well as its stable supply and demand dynamics, have rewarded investors with effective risk-hedging and long-term returns. For instance, gold, in yen, has delivered a stunning 17% return during the first eight months of 2023 (Chart 3) outperforming major assets, following a 16% gain in 2022. And in our 2023 Mid-year Gold Outlook we noted that in the market consensus economic scenario, gold’s performance in 2023 is likely to be in line with its long-term return.
As our above analysis shows, the inclusion of gold in a JPY portfolio already investing in bonds could help improve its performance whilst reducing volatilities further. We believe this, together with lucrative returns in JPY, could make gold an effective complement to JGBs for Japanese investors.
Footnotes
1For more, see: Monetary Policy Releases 2023 : 日本銀行 Bank of Japan (boj.or.jp)
2For more, see: Ueda comments send yen higher, dollar dips ahead of US inflation data (cnbc.com)
Bonds en vogue, but gold never out of style
Jeremy De Pessemier
Asset Allocation Strategist World Gold CouncilWe’re delighted to contribute another thought-leader article published in Financial Investigator’s highly regarded magazine. In their September issue, we review the notion that whilst bonds may be en vogue, gold never goes out of style. The article supports our ongoing belief that gold has a key role to play as a strategic long-term investment and mainstay allocation within a well-diversified portfolio.
Summary
Macroeconomic outlook
Reassured by the resilience in macro data, and frustrated that inflation isn’t falling fast enough, major central banks have continued with the monetary tightening exercise, in some cases coming back to it after a brief pause. And as the lagging impact of their aggressive rate hikes ripples through the economy, the broad trend remains for slowing growth in the back half of the year.
In the eurozone, the European Central Bank (ECB) has lifted interest rates by 4.5% since July last year, back to the highest ever level of 4%, to tame inflation. And while headline inflation is now well off October’s 10.6% year-on-year (y-o-y) peak, dropping to 5.2% y-o-y in August, there is no denying that the pace of growth is decelerating (Chart 1). Indeed, the cost-of-living pressures and the rise in interest rates are weighing on domestic demand.
Chart 1: inflation is cooling, but still above target, and growth is slowing
*As of 31st July 2023
Source: Bloomberg, Eurostat, World Gold Council
With the balance of economic forces tilted against capital markets, investors have been reallocating into safer assets recently. According to Refinitiv’s European Fund Flow Report, fixed income funds saw the largest inflows (€18bn) in June while equity and multi-asset funds faced outflows. The flow pattern for June has cemented the year-to-date trend; i.e. fixed income funds were the asset type with the highest estimated net inflows overall for 2023 so far.
Bonds are attractive, gold looks good as a complementary asset
Fixed income assets do seem like an attractive choice for investors currently. The sharp rise in bond yields since early 2022 and the possibility of rates peaking soon (Chart 2) have improved the return potential in many fixed income sectors. And while inverted yield curves make it less compelling to extend duration, a modest increase in duration could be prudent for investors seeking to hedge against a growth shock.
Chart 2: Investors are expecting lower rates compared to previous projections
Eurozone implied future cash rates*
*As of 11 August 2023.
Source: Bloomberg, World Gold Council
But there are risks associated with this view. Persistent inflationary pressures remain the primary obstacle to monetary easing and could result in further tightening. Moreover, inflation volatility may be part of the medium-term inflation story. In fact, looking at the US experience where we have data going back to 1870, inflation has tended to see echo waves two and five years after its first spike above 7% (Chart 3).
Chart 3: Inflation cycle in the US since the 1870’s
US inflation experienced, on average, multiple bounces after the first spike above 7%*
*Data from January 1872 to December 2022.
Source: Robert Shiller CAPE ratio data, World Gold Council
And the combination of high wage growth, the green transition, deglobalisation and geopolitical uncertainties speaks to an environment of more frequent potential shocks to inflation. Such an environment would require ongoing and fairly dramatic adjustments to monetary policy from the ECB, introducing volatility, potentially below trend growth and the possibility of negative returns in euro fixed income allocations.
Against this backdrop, there are several advantages to diversifying the sources of safety in an investment portfolio beyond just high-quality government bonds. Indeed, gold is a global asset and its diverse sources of demand give it resilience and the potential to deliver solid returns in various market conditions. For instance, following a strong 2022 (+6% in EUR), in which gold outperformed both global equities and eurozone government bonds, the precious metal has delivered another gain of 4.4% during the first seven months of 2023, once again outperforming eurozone government bonds.
Furthermore, Chart 4 highlights that gold can not only be particularly effective in times of high inflation, it can also help during challenging equity markets. While effective diversifiers are sometimes hard to find, with many assets becoming increasingly correlated as market uncertainty rises, gold is different in that its negative correlation to equities and other risk assets, as seen in Chart 4, increases as these assets sell off.
Chart 4: Gold can be an effective addition to a portfolio
a. Gold historically performs well in periods of high inflation
b. Correlation of global equities vs gold and German Bunds in various market environments
*Chart a: inflation computed using annual euro CPI y-o-y changes between 1975 and 2022.
**Chart b: based on weekly returns of the FTSE Global Developed Equity Index, ICE BofA German Government bond Index and the LBMA Gold Price. Data from 31 December 1993 to 30 December 2022.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
These combined characteristics underscore why we believe gold has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio, alongside equities and bonds. Going forward, it is likely that gold and government bonds will perform differently from one another. This feature alone should appeal to investors tasked with managing the potential risks ahead.
More on market perspectives: Gold Mid-year outlook 2023: Between a soft and a hard place
When is a good time to buy gold in Australia?
World Gold Council
The experts on goldDetermining the value of gold can at times make potential investors hesitant. Unable to judge what the price might do, reduces confidence in making an informed decision. Recently, gold in Australian Dollars (AUD) reached its highest ever price and breached A$3,000. While dipping slightly by the end of the first half of 2023, when is the right time to buy, or even increase, a gold allocation into a portfolio?
The global gold market is valued in US Dollars (USD). Gaining insight into such aspects as US real rates and the strength of the USD can help indicate what the price might do in the short to medium term. However, the gold market is much deeper and broader than just these two factors. Its demand is boosted by both economic growth and uncertainty. Since gold is a global asset, demand tailwinds from one region may counteract headwinds from another. These counterfactors pose their own challenges but also give gold its core characteristics as a unique investment.
Influencers of the gold price
Without interest or dividends, typical discounted cash flow models fail when assessing gold. So too do other valuation tools often used for shares and bonds. Gold does not have any expected earnings or book-to-value ratios. But there is a good reason why it does not pay a coupon: with no issuer; it carries no credit risk. Its price is determined by the intersection of demand and supply, (with Australia being one of the world’s largest suppliers). Understanding these drivers, can give more assurance into what determines performance.
*Based on 10-year average annual net demand estimates ending in 2022. Includes: jewellery and technology net recycling, in addition to bars and coins, ETFs and central bank demand which are historically reported on a net basis. It excludes Over-The-Counter demand owing to limitations in data availability. **Net jewellery and technology demand computed assuming 90% of annual recycling comes from jewellery and 10 from technology.
Source: Metal Focus, Refinitiv GFMS, WorldGold Council. Latest Gold Demand Trends can be found on goldhub.com
There is often a misconception that positive economic growth is bad for gold. The recent inflation figures from both the RBA (4.9%)1, and the Fed (3%)2, as well as other major economies has been encouraging. Consumer Price Indices (CPI) appear to be moving in the right direction. Should this continue, there may be talk around the potential of rates decreasing to help kickstart local economies, and thereby enhance consumer spending. As almost half (44%) of gold’s demand originates from the jewellery and technology sectors, economic improvement generally results in increased appetite for such items. This is where regional demand tailwinds are relevant. Consumer demand, while global, is heavily weighted towards China and India who account for over half of jewellery demand.
Investment demand (38%) can over the short term, exert strong pressure on gold’s price. This type of tactical demand from physical markets, exchange-traded securities and over-the-counter (OTC) products has historically experienced increases during periods of economic and political uncertainty, and falls as confidence grows. As gold is one of the most active daily traded assets, there is a tendency to suggest that it is highly volatile. Yet, in reality, over the medium to long-term, it is less volatile than Australian Real Estate Investment Trusts, and on par with the ASX 200.
Data as of 30 June 2023.
Sources: Bloomberg, CBOE, COMEX, World Gold Council; More information and comparisons available on goldhub.com
Central Banks account for almost a fifth (18%) of gold demand to help diversify reserves. In the past, many have been forced to print more money, this increase in supply, while helping to stave off economic turmoil, carries the cost of devaluing the currency. Gold, by contrast, is a finite physical commodity whose supply can’t easily be added to. It is a natural hedge against inflation.
But it’s diversification that matters
All prudent investors will be mindful that protecting long-term investments is fundamental. When determining an investment strategy, questions over protection are generally focused upon;
There is no standard diversification model. Investment appetite, fund life stages, and personal sentiment can result in allocations varying from one portfolio to another. But, according to a recent Calastone3 report, Australian investors fled managed international equity, property and mixed asset funds at a record level during Q2 2023. Fixed income funds were the beneficiaries. Given the higher interest rate environment, this is not too surprising. Many investors look upon these products as fulfilling a traditional role of diversification, offering protection during periods when risk assets have come under pressure. In the main, fixed income products certainly help, but they are not absolute.
When inflation is below 2%, the correlation between global equities and treasuries has been negative, providing diversification. At levels above 2%, this relationship has historically started to break down4.
In summary
Understanding the broader drivers of gold’s price can improve investor confidence, and unlike some other defensive assets, gold has various demand sources, which complement the other over different economic and market conditions.
The answer to when there is a good time to buy gold depends upon the investor’s strategy and objectives. A diversified portfolio, needs the insurance over the medium to long term to help ride out unforeseen market events. Gold can help achieve that, but can also stand its ground in calmer times (if history is anything to go by). Therefore, there is never a bad time to think about the right allocation.
Footnotes
1Inflation Overview | RBA
2Consumer prices up 3.0 percent over the year ended June 2023 : The Economics Daily: U.S. Bureau of Labor Statistics (bls.gov)
3Australian investors flee managed equity funds at record speed for the safety of fixed income and cash – Calastone
4The relevance of gold for Australian Self-Managed Super Funds | World Gold Council
Confused about owning gold in an Individual Retirement Account? Don’t be, it’s easy if you do a little homework!
Joseph Cavatoni
Senior Market Strategist, North America World Gold CouncilOver the course of this year, I have been fielding an increasing number of questions from US investors and media about owning precious metals, in particular gold, in an individual retirement account (“IRA”). When I did my own independent, online research, I found that the information available on the web can be confusing and, in many ways, misleading if not downright inaccurate. This blog is a very simple and concise summary, for anyone interested in achieving the benefits of gold in their retirement account. Read on for the facts and information that you need to know, and some guidance to assist you along the way.
Let’s start with gold as an investment. World Gold Council research shows that most portfolios can benefit from an allocation to gold. As the current market environment continues to prove quite challenging for investors and makes portfolio management difficult, our data suggests a strategic allocation to gold can provide long-term returns and lower overall portfolio volatility.
The favorable effects of a strategic allocation to gold are due to its significant level of liquidity and unique performance behavior, which is driven by both investment and consumer demand. The “dual nature” of gold as both an investment asset and a consumer good makes gold an excellent addition to a diversified portfolio and delivers long-term returns in both good and bad economic environments.
A bit about IRA’s
An IRA is a method of long-term savings that an individual can use, and it offers: the ability to save for the future, a platform for providing returns and the potential for certain tax advantages in the future. As IRAs are long-term by design, they offer an excellent platform for investors to diversify and reap the benefits of an allocation to gold.
For investors, attention to the details is necessary when making the decision to invest in gold using an IRA. To start, there are four typical types of IRA accounts as defined by the IRS:
Each has different rules regarding eligibility, taxation, and withdrawals. What is not a defined account type by the IRS is a “precious metal” or “gold” IRA account, and anyone insisting you need this type of account to invest in precious metals could be misrepresenting the facts. There are no such defined terms under the Internal Revenue Code of 1986 (the “Code”). Any investor may make use of open/existing IRA accounts to make your investment. It's worth noting that some organizations might try to use these labels to “brand” their business activity, but it is not a legal structure that is different to the IRS defined accounts. The key is, your existing provider needs to confirm they are set up and ready to accept your investment.
Can I own regulated gold financial instruments in my IRA?
A simple and effective way for investors to access gold in an IRA would be to make use of the large and established physical gold-backed exchange traded funds (“ETF”) market. Section 408(m) of the Code defines what types of collectibles and precious metals can be included in an IRA. In 2004, the IRS clarified through private letter rulings that under this section, the purchase of shares of a gold ETF by the trustee or custodian of an IRA would not be treated as the acquisition of a collectible resulting in a taxable distribution to the IRA owner.
Gold ETFs are liquid, easy to access and track the gold price making them a very sensible and viable investment choice. As physical gold-backed ETFs are technically equity instruments, there are no account or trading restrictions. However, it would be sensible to confirm with your IRA trustee/custodian that you are looking to have the instrument added to your existing IRA and that they are clear on the process to make that investment through the purchase of a gold-backed ETF.
Can I own physical gold in my IRA?
Separately, an investor may choose to make an investment in gold in physical form in their IRA provided the form of physical gold qualifies under section 408(m) of the Code which requires that the gold meet certain criteria (primarily purity and liquidity requirements).
In addition to understanding the types of gold eligible through physical investment, there are other key considerations an investor will need to review before implementing an allocation to physical gold. A critical key point to address straight away is the need for your IRA trustee/custodian to provide the essential platform for investing in the physical market as not all IRA platforms permit this type of access. A client needs to ensure that their IRA trustee/custodian offers access to the appropriate forms of gold, and that they have the means/capabilities to hold the gold in custody. This is a condition that must be met to ensure the investment is in line with the IRS ruling that initially provided for the investment. Once your IRA trustee/custodian confirms that that they can offer you access to precious metals, you can gain access to gold using the various types of IRAs equally (traditional, Roth, etc.).
Once I am clear that I want to own gold and can hold gold, what should I do next?
We recommend to any individual who is interested in adding gold, either using a regulated financial instrument like an ETF or in physical form, that they should start with familiarizing themselves with our Retail Gold Investment Guidance. This framework has been designed to provide investors with five simple steps to follow and various questions to ask before any steps are taken to invest in gold.
If you are being approached by an organization that is unfamiliar to you and experience selling behaviors that include, for example, high pressured sales tactics or directives like “you need a new account, there is no other way”, realize that these are signs that you should slow down and ask more questions. Remember, you are looking at your long-term savings, and no one needs to make a hasty decision and put any of your assets at risk.
If you are pursuing this investment opportunity on your own, once you decide that you are comfortable with adding a gold allocation to your savings, you should contact your investment advisor/IRA administrator to discuss the possible options available to you.
Want to learn more about the gold market? Visit Goldhub.org
Important disclaimers and disclosures
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All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other content is the intellectual property of the respective third party and all rights are reserved to them.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below. Information and statistics are copyright © and/or other intellectual property of the World Gold Council or its affiliates (collectively, “WGC”) or third-party providers identified herein. All rights of the respective owners are reserved.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus, Refinitiv GFMS or other identified copyright owners as their source. World Gold Council is affiliated with Metals Focus.
WGC does not guarantee the accuracy or completeness of any information nor accepts responsibility for any losses or damages arising directly or indirectly from the use of this information. This information is for educational purposes only and by receiving this information, you agree with its intended purpose.
Nothing contained herein is intended to constitute a recommendation, investment advice, or offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). This information does not take into account any investment objectives, financial situation or particular needs of any particular person.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. WGC does not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information contains forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. WGC assumes no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. WGC provides no warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
You asked, we answered: What’s the impact of geopolitics on gold?
Johan Palmberg
Senior Quantitative Analyst World Gold CouncilGold has gained more than 3% this week largely attributed to an escalation of geopolitical tensions linked to the Israeli-Palestinian conflict. 1
As a crisis hedge, gold has a solid history, driven by its lack of credit risk and negative correlation to risk assets. But it is likely that geopolitical tensions on their own might influence gold returns, even when accounting for the change in other factors. We set out to test this idea.
Capturing the transmission channels of geopolitical risk can be challenging. Political context, geographical concentration and the likelihood of proliferation all matter, as does whether the increase in risk comes from a perceived threat or an actual act of aggression.
Also, many historical episodes are too idiosyncratic to act as useful guides. Fortunately, a number of indices exist to quantify geopolitical risk. Arguably the most well-known is the Geopolitical Risk (GPR) index by Matteo Iacoviello that measures both actual and perceived geopolitical tension.2 The GPR index has a reliable track record of reflecting observed impacts to underlying economic variables at a global level (Chart 1).
Chart 1. The Iacoviello GPR index consistently captures historical acts and threats of geopolitical tension
Source: Matteo Iacoviello, World Gold Council
We use our Gold Return Attribution Model (GRAM) to quantify the impact of key drivers on gold returns, both on monthly and weekly frequencies.3 It is an invaluable and historically accurate guide. But from time to time, the model produces a more noticeable residual. When this occurs, the likely culprit is either a missing factor or a change in the sensitivity of gold to the existing factors.
In 2022, for example, there were at least two instances of these more sizeable residuals: in Q2 and Q3. We know subsequently that there was considerable central bank buying during these quarters, and the Russian invasion of Ukraine occurred in late February – two factors that are not explicitly included in our model and are likely candidates for missing variables. We don’t currently have a reliable series to capture non-reported monthly central bank buying, but the GPR could conceivably capture the additional impact of geopolitics on gold.
This is what our analysis shows. Even though the model already includes inflation, bond yields, currencies, crude oil and implied gold volatility – variables likely to respond to a rise in geopolitical tension – the impact of the GPR index is visible,4 and it adds to the model’s explanatory power (Chart 2).
Chart 2: By adding the GPR index to GRAM, we can quantify gold’s geopolitical risk premium
Source: Bloomberg, World Gold Council
For more on GRAM see here. GPR is added as the de-meaned log of the GPR index.
The conclusion we can draw from this is that gold – likely via investor flows – responds to elevated geopolitical risk even when controlling for the movement in the existing variables in the model. And we can attach a number to this response: an increase in the GPR index by 100 units holding all else constant, has a c.2.5% positive impact on gold’s return. For example, the GPR index rose from under 100 to over 250 at the start of the Russia-Ukraine conflict last year, while 9/11 saw it spike above 450 from under 50.
GPR index spikes have in recent times been short-lived, however. This partly reflects a shorter news cycle than in the past. It does not suggest that gold’s reaction is short-lived, as the follow-through from a spike to other variables and sentiment can potentially last longer. But there is also a slight medium-term risk for gold from a rise in tensions, via higher inflation for example, which could potentially delay a gold-friendly monetary pivot by the Fed and other central banks.
In summary, gold’s performance this week is not a coincidence and can be measurably attributed to the Israeli-Palestinian conflict. How long this effect will last will depend on the wider ramifications the conflict may have on the global economy. And, in either case, given the increased frequency and unpredictability of geopolitical risks, it further supports the case for a consistent, strategic allocation to gold.
Footnotes
Based on the LBMA Gold Price PM between 6 and 12 October 2023. Gold’s performance over the period was also supported by the 20-basis point fall in US 10-year TIPS yields and a small drop in the US dollar.
Matteo Iacoviello is a Senior Associate Director of International Finance at the Board of Governors of the US Federal Reserve System.
GRAM is a multiple regression model of weekly and monthly gold price returns, comprised of approximately 15 explanatory variables which we group into four key thematic driver categories of gold’s performance: economic expansion, risk & uncertainty, opportunity cost, and momentum.
The coefficient is positive and statistically significant at the 5% level but its individual contribution is relatively small, as there are other variables that are also responding to changes in geopolitical risk, as we saw the oil price do over the weekend for example. Model R-squared increases to 0.645 from 0.635 following the inclusion of the GPR. We isolate the total impact of GPR by removing other current variables from the model.
Unearthed: Lori Heinel, State Street Global Advisors’ Global Chief investment Officer, opens with macroeconomics
Unearthed Podcast
World Gold CouncilIn the opening episode of Unearthed, hosts John Reade and Joe Cavatoni – Market Strategists at World Gold Council - celebrate the launch of their new podcast, focusing on macroeconomic trends and their impact on the investment landscape.
Joined by Lori Heinel, the Global Chief Investment Officer at State Street Global Advisors, the group discuss the current market conditions, the role of central banks in addressing inflation and the potential implications of the upcoming U.S. election on investor sentiment. Heinel also shares insights on portfolio diversification strategies and the evolving trends in ETFs, including those for gold, highlighting their significance in today's economic climate.
Disclaimer
Important information and disclaimers
© 2025 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other content is the intellectual property of the respective third party and all rights are reserved to them.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below. Information and statistics are copyright © and/or other intellectual property of the World Gold Council or its affiliates or third-party providers identified herein. All rights of the respective owners are reserved.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus or other identified copyright owners as their source. World Gold Council is affiliated with Metals Focus.
The World Gold Council and its affiliates do not guarantee the accuracy or completeness of any information nor accept responsibility for any losses or damages arising directly or indirectly from the use of this information.
This information is for educational purposes only and by receiving this information, you agree with its intended purpose. Nothing contained herein is intended to constitute a recommendation, investment advice, or offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). This information does not take into account any investment objectives, financial situation or particular needs of any particular person.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
Unearthed: The impact of geopolitics on gold ft. Tina Fordham, Fordham Global Foresight
Unearthed Podcast
World Gold CouncilIn this episode of the podcast, hosts John Reade and Joe Cavatoni are joined by Tina Fordham, the founder of Fordham Global Foresight. The conversation delves into the current global geopolitical climate, questioning whether recent tensions signify a long-term escalation.
They explore the implications of central banks, particularly in emerging markets, diversifying their reserves away from traditional holdings like the U.S. dollar, and whether this indicates a shift from Western dominance.
The discussion also covers the effectiveness of geopolitical risk indices, the evolving dynamics of Western relations with China, and the potential impact of the upcoming U.S. elections and other global elections in 2024. Fordham also shares her insights on critical geopolitical developments that are under the radar but warrant attention.
Disclaimer
Important information and disclaimers
© 2025 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other content is the intellectual property of the respective third party and all rights are reserved to them.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below. Information and statistics are copyright © and/or other intellectual property of the World Gold Council or its affiliates or third-party providers identified herein. All rights of the respective owners are reserved.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus or other identified copyright owners as their source. World Gold Council is affiliated with Metals Focus.
The World Gold Council and its affiliates do not guarantee the accuracy or completeness of any information nor accept responsibility for any losses or damages arising directly or indirectly from the use of this information.
This information is for educational purposes only and by receiving this information, you agree with its intended purpose. Nothing contained herein is intended to constitute a recommendation, investment advice, or offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). This information does not take into account any investment objectives, financial situation or particular needs of any particular person.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.