The global COVID-19 pandemic fuelled safe-haven investment demand for gold, offsetting marked weakness in consumer-focused sectors of the market.
The benefits of certain portfolio hedges came into clear focus during the 2008-2009 financial crisis and did so again during the subsequent European sovereign debt crisis, the 2018 December stock market pullback and the most recent COVID-19 pandemic.
Gold plays a prominent role in reserve asset management, being one of the few assets that is universally permitted by the investment guidelines of the world’s central banks. This is in part due to the gold market being deep and liquid – a key requirement of reserve asset managers.
We believe that the recent volatility in the gold price was driven by massive liquidations across all assets and likely magnified by leveraged positions and rule-based trading.
Our analysis illustrates that adding between 2% and 10% in gold to a hypothetical US pension fund average portfolio over the past decade would have resulted in higher risk-adjusted returns.
Gold demand fell 1% in 2019 as a huge rise in investment flows into ETFs and similar products was matched by the price-driven slump in consumer demand.
Risk appetite amid high uncertainty
As we look ahead, we expect that the interplay between market risk and economic growth will drive gold demand in 2020
Surge in ETF inflows supports Q3 gold demand growth. Gold demand grew modestly to 1,107.9t in Q3 thanks to the largest ETF inflows since Q1 2016
Re-optimising portfolio structures for lower future expected bond returns suggests investors should consider an additional 1%-1.5% gold exposure in diversified portfolios.