Singapore edition

Sectors: Investment

What makes gold a strategic asset?

Gold benefits from diverse sources of demand: as an investment, a reserve asset, jewellery, and a technology component. It is highly liquid, no one’s liability, carries no credit risk, and is scarce, historically preserving its value over time.

 

Gold can enhance a portfolio in four key ways:

Returns

Diversification

Liquidity

Portfolio performance

 

Extraordinary times with extraordinary opportunities 

2020 posed unprecedented challenges to investors as the first global pandemic in a century ravaged the world economically and socially.

COVID-19 significantly increased uncertainty by compounding existing risks and creating new ones. The rollout of new vaccines at the end of last year fuelled optimism that the worst was over. Yet the pandemic and the ensuing policy response from governments will likely have unintended consequences for, and create structural changes to, asset allocation strategies. 

Global central banks have effectively taken interest rates to zero, driving nearly all sovereign debt to negative real yields. With less opportunity for yield across fixed income assets – especially those of shorter duration or higher quality – investors will likely continue to shift exposure to riskier assets. This has pushed many global stock markets to extreme levels on numerous valuation metrics and – importantly - has also served to increase the risk profile of most investment portfolios.

Additionally, many countries have made it clear they will continue to enact sizeable fiscal policy measures to tackle the economic impact of COVID-19, along with expanding budget deficits and balance sheets. 

We believe these actions - in combination with the current environment have made gold increasingly relevant as a strategic asset. Not only could investors benefit from gold’s role as a diversifier amid ballooning budget deficits, inflationary pressures, and potential market corrections from already high equity valuations, but they may also see additional support as gold consumption will likely benefit from the nascent economic recovery, especially in emerging markets  (see 2021 Gold Outlook).

ESG considerations

Over recent years, investors have increasingly looked to integrate environmental, social and governance (ESG) considerations as part of their investment process. For example, 89% of European investors now take ESG factors into account when they make investment decisions.2 This increased emphasis on ESG reflects increasing pressure for businesses to actively manage ESG risks. It also emphasises that good ESG performance could lead to better long-term financial performance.3 This shift towards a greater integration has important implications for gold, which needs to demonstrate that it is produced and sourced responsibly, as well as the role that gold can play in supporting ESG objectives within a portfolio (Focus 2: Gold is an ESG investment).4

The increased relevance of gold

Institutional investors5 have embraced alternatives to traditional investments such as equities and bonds in pursuit of diversification and higher risk-adjusted returns. The share of non-traditional assets, such as hedge funds, private equity funds or commodities, among global pension funds increased from 7% in 1999 to 26% in 2020 – this figure is 30% in the US (Chart 1).6

Gold allocations have been recipients of this shift. Investors increasingly recognise gold as a mainstream investment; global investment demand has grown by an average of 15% per year since 2001 and the gold price has increased five-fold over the same period.7

 

Chart 1: Alternative investments including gold have become a key portfolio strategy

Alternative investments including gold have become a key portfolio strategy

Institutional investors continue to add alternative investments, including gold, to their portfolios*

Alternative investments including gold have become a key portfolio strategy
Institutional investors continue to add alternative investments, including gold, to their portfolios*
Sources: World Gold Council, Willis Towers Watson; Disclaimer *As of December 2020. See Willis Towers Watson, Global Pension Asset Study 2021.

Sources: World Gold Council, Willis Towers Watson; Disclaimer

 

 

Gold performance has been strong over time, driven by key market growth and change in key markets

 

Gold performance has been strong in recent decades, supported by key structural changes

Gold performance has been strong in recent decades, supported by key structural changes
Sources: World Gold Council

Sources: World Gold Council; Disclaimer

 

Gold’s strategic role

Our analysis shows gold is a clear complement to equities, bonds and broad-based portfolios. A store of wealth and a hedge against systemic risk, currency depreciation and inflation, gold has historically improved portfolios’ risk-adjusted returns, delivered positive returns, and provided liquidity to meet liabilities in times of market stress. 

A source of returns

Investors have long considered gold a beneficial asset during periods of uncertainty. Historically, it has generated long-term positive returns in both good and bad economic times. Looking back almost half a century, the price of gold in US dollars has increased by an average of nearly 11% per year since 19719 when the gold standard collapsed.10 Over this period, gold’s long-term return is comparable to equities and higher than bonds.11 Gold has also outperformed many other major asset classes over the past five, 10 and 14 years (Chart 2 and Chart 3). 

This duality reflects the diverse sources of demand for gold and differentiates it from other investment assets. Gold is often used to protect and enhance wealth over the long term as it is no one’s liability, and it operates as a means of exchange due to its global recognition. 

Gold is also in demand via the jewellery market, valued by consumers across the world. And it is a key component in electronics.12 These diverse sources of demand give gold a particular resilience: the potential to deliver solid returns in various market conditions (Chart 7, p6).

 

Chart 2: Gold has outperformed most broad-based portfolio components over the past two decades*

Gold has outperformed most broad-based portfolio components over the past two decades*

Average annual return of key global assets in US dollars*

Gold has outperformed most broad-based portfolio components over the past two decades*
Average annual return of key global assets in US dollars*
*Returns from 31 December 2006 to 31 December 2020, based on availability of data. Period chosen for consideration limited by availability of Asia corporate and government bond indices. Computations in US dollars of total return indices for MSCI APAC Real Estate Index, S&P Pan Asia Corporate Bond Index, MSCI AC Asia Pacific Index, MSCI AC ASEAN Index, Bloomberg Commodity Index, MSCI World Index, MSCI Singapore Index, S&P Pan Asia Government Bond Index and spot for LBMA Gold Price PM. Sources: Bloomberg, ICE Benchmark Administration, MSCI Inc, S&P Dow Jones Indices, World Gold Council Goldhub.com see: Gold returns.

Sources: Bloomberg, ICE Benchmark Administration, MSCI Inc, S&P Dow Jones Indices, World Gold Council; Disclaimer

*Returns from 31 December 2006 to 31 December 2020, based on availability of data. 
Period chosen for consideration limited by availability of Asia corporate and government bond indices. Computations in US dollars of total return indices for MSCI APAC Real Estate Index, S&P Pan Asia Corporate Bond Index, MSCI AC Asia Pacific Index, MSCI AC ASEAN Index, Bloomberg Commodity Index, MSCI World Index, MSCI Singapore Index, S&P Pan Asia Government Bond Index and spot for LBMA Gold Price PM. 

Goldhub.com see: Gold returns.

 

Chart 3: Gold has performed well over the past decade, despite the strong performance of risk assets

Gold has performed well over the past decade, despite the strong performance of risk assets

Average annual return over the past five and 10 years*

Gold has performed well over the past decade, despite the strong performance of risk assets
Average annual return over the past five and 10 years*
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council *Returns in yen from 31 December 2010 to 31 December 2020. See Chart 2 for respective indices. On Goldhub.com see: Gold returns.

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*Returns in yen from 31 December 2010 to 31 December 2020. See Chart 2 for respective indices.

On Goldhub.com see: Gold returns.

 

Beating inflation, combating deflation

Gold has long been considered a hedge against inflation and the data confirms this. If an investor had bought gold in the domestic currencies of Indonesia, Thailand, Singapore, Vietnam or Malaysia, their annualised compounded return would have outpaced average annual inflation in these countries over the past 30 years.13

Gold also protects investors against high and extreme inflation. In years when local inflation was higher than its 30-year median, the price of gold increased by 9.85% on average across the five countries above (Chart 4). Over the long term, therefore, gold has not just preserved capital but helped it grow. 

Research also shows that gold should do well in periods of deflation.14 Such periods are characterised by low interest rates, reduced consumption and investment, and financial stress, all of which tend to foster gold demand.

 

Chart 4: Gold is a source of returns in periods of both high and low inflation

Chart 4: Gold is a source of returns in periods of both high and low inflation

Gold and commodity returns in US dollars as a function of annual inflation*

Chart 4: Gold is a source of returns in periods of both high and low inflation
Gold and commodity returns in US dollars as a function of annual inflation*
*Based on y-o-y changes of the LBMA Gold Price in domestic currencies and consumer prices between 1991 and 2020. Low inflation corresponds to periods when annual inflation was lower than the country’s median inflation rate since 1991. High inflation corresponds to periods when annual inflation was higher than the country’s median inflation rate since 1991. Sources: Bloomberg, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*Based on y-o-y changes of the LBMA Gold Price in domestic currencies and consumer prices between 1991 and 2020. Low inflation corresponds to periods when annual inflation was lower than the country’s median inflation rate since 1991. High inflation corresponds to periods when annual inflation was higher than the country’s median inflation rate since 1991. 

 

Outperforming fiat currencies

Investor demand has been boosted by persistently low interest rates and concerns about the outlook for the dollar, which affect the perceived opportunity cost of holding gold.

Historically, major currencies were pegged to gold. That changed with the unravelling of the US gold standard in 1971 and the eventual collapse of the Bretton Woods system.15 Since then, with few exceptions, gold has significantly outperformed all major currencies and commodities as a means of exchange (Chart 5). This outperformance was particularly marked immediately after the end of the gold standard. A key factor behind this robust performance is that the supply growth of gold has changed little over time – increasing by approximately 1.4% per year over the past 20 years.16

By contrast, fiat money can be printed in unlimited quantities to support monetary policy, as exemplified by the quantitative easing measures in the aftermath of the Global Financial Crisis (GFC).17  In recent years, the rapidly increasing global money supply and a low to negative rate environment have fostered an optimal environment for gold to outperform global sovereign debt, such as US treasuries and to track the global money supply (Chart 6, p6). 

 

Chart 5: The purchasing power of major currencies and commodities has significantly eroded relative to gold

The purchasing power of major currencies and commodities has significantly eroded relative to gold

Value of currencies and broad commodities relative to gold (January 2000 = 100)*

The purchasing power of major currencies and commodities has significantly eroded relative to gold
Value of currencies and broad commodities relative to gold (January 2000 = 100)*
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council *As of 31 December 2020. Relative value between ‘gold’: LBMA Gold Price PM, ‘commodities’: Bloomberg Commodity Index, and major currencies since 2000. Value of commodities and currencies measured in ounces of gold and indexed to 100 in January 2000. On Goldhub.com see: Gold prices.

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*As of 31 December 2020. Relative value between ‘gold’: LBMA Gold Price PM, ‘commodities’: Bloomberg Commodity Index, and major currencies since 2000. Value of commodities and currencies measured in ounces of gold and indexed to 100 in January 2000. 

On Goldhub.com see: Gold prices.

 

 

Chart 6: Gold prices have tracked the expansion of global money supply and outpaced T-bills over time

Gold prices have tracked the expansion of global money supply and outpaced T-bills over time

Global M2 growth, US 3m T-bill total return, gold price*

Gold prices have tracked the expansion of global money supply and outpaced T-bills over time
Global M2 growth, US 3m T-bill total return, gold price*
Sources: Bloomberg, ICE Benchmark Administration, Oxford Economics, World Gold Council *As of 31 December 2020. Data starts in 1973 due to data availability. Global M2 is first calculated by aggregating the available universe of individual country M2 in US dollars (excluding Venezuela due to data quality) as provided by Oxford Economics. The resulting aggregate is then re-based to 100 on January 1973. US 3m T-bill total returns constructed using cumulative returns based on 3-month US T-bill yields and also rebased to 100 on January 1973. Gold based on the LBMA Gold Price PM USD.

Sources: Bloomberg, ICE Benchmark Administration, Oxford Economics, World Gold Council; Disclaimer

*As of 31 December 2020. Data starts in 1973 due to data availability. Global M2 is first calculated by aggregating the available universe of individual country M2 in US dollars (excluding Venezuela due to data quality) as provided by Oxford Economics. The resulting aggregate is then re-based to 100 on January 1973. US 3m T-bill total returns constructed using cumulative returns based on 3-month US T-bill yields and also rebased to 100 on January 1973. Gold based on the LBMA Gold Price PM USD.

 

Diversification that works

The benefits of diversification are widely acknowledged – but it is hard to find effective diversifiers. Many assets become increasingly correlated as market uncertainty rises and volatility is more pronounced, driven in part by risk-on/risk-off investment decisions. As a result, many so-called diversifiers fail to protect portfolios when investors need them most. 

Gold is different in that its negative correlation to equities and other risk assets generally increases as these assets sell off (Chart 7). The GFC is a case in point. Equities and other risk assets tumbled in value, as did hedge funds, real estate and most commodities, which were long deemed portfolio diversifiers. Gold, by contrast, held its own and increased in price, rising 30% in Singapore dollars from December 2007 to February 2009.18 And in the most recent sharp equity market pullbacks of 2018 and 2020, gold performance remained positive.19

This robust performance is perhaps not surprising. With few exceptions, gold has been particularly effective during times of systemic risk, delivering positive returns and reducing overall portfolio losses (Chart 8, p7). Importantly too, gold allows investors to meet liabilities when less liquid assets in their portfolio are difficult to sell, or possibly mispriced. 

But gold’s correlation does not just work for investors during periods of turmoil. It can also deliver positive correlation with equities and other risk assets in positive markets, making gold a well-rounded efficient hedge 
(Chart 9, p7), (see Gold: an efficient hedge).

This dual benefit arises from gold’s dual nature: as both an investment and a consumer good (Chart 18, p15). As such, the long-term performance of gold is supported by income growth. Our analysis bears this out, showing that when equities rally strongly, their correlation to gold can increase. This is most likely driven by a wealth-effect supporting gold consumer demand, as well as demand from investors seeking protection against higher inflation expectations.

 

Chart 7: Gold has been more negatively correlated with equities in extreme market selloffs than commodities

Gold has been more negatively correlated with equities in extreme market selloffs than commodities

Correlation between gold, Straits Times Index and ASEAN equity returns in various global equity environments since 2000*

Gold has been more negatively correlated with equities in extreme market selloffs than commodities
Correlation between gold, Straits Times Index and ASEAN equity returns in various global equity environments since 2000*
"* As of 31 December 2020. Correlations computed using weekly returns in US dollars based on the MSCI World Index, MSCI AC ASEAN Index, and the LBMA Gold Price PM since December 2000. The middle bar corresponds to the unconditional correlation over the full period. The bottom bar corresponds to the correlation conditional on the MSCI World Index weekly return increasing by more than two standard deviations (or ‘σ’), while the top bar corresponds to the MSCI World Index weekly return decreasing by more than two standard deviations. The standard deviation is based on the same weekly returns over the full period. On Goldhub.com see: Gold correlation. Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

"* As of 31 December 2020. Correlations computed using weekly returns in US dollars based on the MSCI World Index, MSCI AC ASEAN Index, and the LBMA Gold Price PM since December 2000. 
The middle bar corresponds to the unconditional correlation over the full period. The bottom bar corresponds to the correlation conditional on the MSCI World Index weekly return increasing by more than two standard deviations (or ‘σ’), while the top bar corresponds to the MSCI World Index weekly return decreasing by more than two standard deviations. The standard deviation is based on the same weekly returns over the full period.  

On Goldhub.com see: Gold correlation.

 

Chart 8: The gold price tends to increase in periods of systemic risk

The gold price tends to increase in periods of systemic risk

ASEAN equities and gold versus the VIX index*

The gold price tends to increase in periods of systemic risk
ASEAN equities and gold versus the VIX index*
*Dates used: September 11: 9/2001; Great recession: 12/2007–3/2009; China Deleveraging: 04/2015–01/2016; Sovereign debt crisis: 08/2011–10/2011; COVID-19 crisis: 02/2020 - 04/2020 Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* Dates used: September 11: 9/2001; Great recession: 12/2007–3/2009; China Deleveraging: 04/2015–01/2016; Sovereign debt crisis: 08/2011–10/2011; COVID-19 crisis: 02/2020 - 04/2020

Asset Performance during
market sell-off*
Performance during
market recovery*
  Average Median Average Median
Gold (SGD / oz) 9.3% 10.0% 3.8% 1.5%
Gold (IDR / oz) 15.7% 8.5% 5.8% 5.1%
MSCI ASEAN -30.0% -25.0% 46.2% 28.1%

*Average and median returns based off time horizons in Charts 8 and 9.
Source: Bloomberg, World Gold Council

 

Chart 9: Gold prices perform well following the period after a systemic selloff and its subsequent recovery

Gold prices perform well following the period after a systemic selloff and its subsequent recovery

Performance of gold and ASEAN equities from the market trough (bottom) to the market recovery point (equity market levels before the systemic selloff)

Gold prices perform well following the period after a systemic selloff and its subsequent recovery
Performance of gold and ASEAN equities from the market trough (bottom) to the market recovery point (equity market levels before the systemic selloff)
*Returns in US dollars. Dates used are based off the end dates of Chart 8. September 11: 9/2001-01/2002; Great recession: 03/2009–04/2010; China Deleveraging: 01/2016–10/2017; Sovereign debt crisis: 10/2011–09/2012; COVID-19 crisis: 05/2020 - 01/2021. Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*Returns in US dollars. Dates used are based off the end dates of Chart 8. September 11: 9/2001-01/2002; Great recession: 03/2009–04/2010; China Deleveraging: 01/2016–10/2017; Sovereign debt crisis: 10/2011–09/2012; COVID-19 crisis: 05/2020 - 01/2021. 

 

A deep and liquid market

The gold market is large, global and highly liquid. 

We estimate that physical gold holdings by investors and central banks are worth approximately US$4.8tn, with an additional US$1.2tn in open interest through derivatives traded on exchanges or the over-the-counter (OTC) market (Chart 16a, p14).

The gold market is also more liquid than several major financial markets, including the CSI 300, euro/yen and US 1-3 Notes, while trading volumes are similar to those of the S&P 500 (Chart 10). Gold’s trading volumes averaged approximately US$183bn per day in 2020. During that period, OTC spot and derivatives contracts accounted for US$110bn and gold futures traded US$69bn per day across various global exchanges. Gold-backed ETFs (gold ETFs) offer an additional source of liquidity, trading an average of US$3.3bn per day (Chart 10).

The scale and depth of the market mean that it can comfortably accommodate large, buy-and-hold institutional investors. In stark contrast to many financial markets, gold’s liquidity does not dry up, even at times of financial stress, making it a much less volatile asset (Chart 12). 

 

Chart 10: Gold trades more than many other major financial assets

Gold trades more than many other major financial assets

One-year average trading volumes of a number of major assets in Singapore dollars*

Gold trades more than many other major financial assets
One-year average trading volumes of various major assets in Singapore dollars*
*Average daily volumes from 31 December 2010 to 31 December 2020, except for currencies that correspond to March 2019 volumes due to data availability. **Gold liquidity includes estimates of OTC transactions and published statistics on futures exchanges, and gold-backed exchange-traded products. On Goldhub.com see: Gold trading volumes. Source: Bloomberg, Bank for International Settlements, UK Debt Management Office (DMO), Germany Finance Agency, Japan Securities Dealers Association, Nasdaq, World Gold Council

Sources: Bloomberg, Bank for International Settlements, UK Debt Management Office (DMO), Germany Finance Agency, Japan Securities Dealers Association, Nasdaq, World Gold Council; Disclaimer

*Average daily volumes from 31 December 2010 to 31 December 2020, except for currencies that correspond to March 2019 volumes due to data availability.
**Gold liquidity includes estimates of OTC transactions and published statistics on futures exchanges, and gold-backed exchange-traded products. 

On Goldhub.com see: Gold trading volumes.

 

Chart 11: Gold is liquid across key investment platforms

Gold is liquid across key investment platforms

Average daily trading volume by point of access in 2020*

 

Gold is liquid across key investment platforms
Average daily trading volume by point of access in 2020*
Sources: Bloomberg, Nasdaq, World Gold Council *Average daily trading volume from 1 January 2020 to 31 December 2020 Gold liquidity includes estimates of over-the-counter (OTC) transactions and published statistics on futures exchanges, and gold-backed exchange-traded products. For more information, see Gold trading volumes on Goldhub.com.

Sources: Bloomberg, Nasdaq, World Gold Council; Disclaimer

*Average daily trading volume from 1 January 2020 to 31 December 2020
Gold liquidity includes estimates of over-the-counter (OTC) transactions and published statistics on futures exchanges, and gold-backed exchange-traded products. For more information, see Gold trading volumes on Goldhub.com.

 

 

Chart 12: Gold has been less volatile than many equity indices, alternatives and commodities because of its scale, liquidity and diverse sources of demand

Gold has been less volatile than many equity indices, alternatives and commodities because of its scale, liquidity and diverse sources of demand

Average daily volatility of several major assets since 2000*

Gold has been less volatile than many equity indices, alternatives and commodities because of its scale, liquidity and diverse sources of demand
Average daily volatility of several major assets since 2000*
Sources: Bloomberg, COMEX , World Gold Council *Annualised volatility is computed based on daily returns in US dollars between 31 December 2000 and 31 December 2020. Computations in US Dollar Spot of total return indices for S&P 500 INDEX, MSCI Daily TR Gross EM USD, MSCI AC World Daily TR Gross USD, LBMA Gold Price PM USD, Bloomberg Commodity Index Total Return, LBMA Silver Price - Price/USD, Bloomberg WTI Crude Oil Subindex Total Return, Bloomberg Barclays Global-Aggregate Total Return Index Value Unhedged USD, S&P GSCI Copper Official Close Index TR, S&P GSCI Platinum Index TR ,FTSE Bursa Malaysia KLCI Index - Kuala Lumpur Composite Index, Korea Stock Exchange KOSPI Index, Straits Times Index STI. On Goldhub.com see: Gold volatility

Sources: Bloomberg, COMEX , World Gold Council; Disclaimer

*Annualised volatility is computed based on daily returns in US dollars between 31 December 2000 and 31 December 2020. Computations in US Dollar Spot of total return indices for S&P 500 INDEX, MSCI Daily TR Gross EM USD, MSCI AC World Daily TR Gross USD, LBMA Gold Price PM USD, Bloomberg Commodity Index Total Return, LBMA Silver Price - Price/USD, Bloomberg WTI Crude Oil Subindex Total Return, Bloomberg Barclays Global-Aggregate Total Return Index Value Unhedged USD, S&P GSCI Copper Official Close Index TR, S&P GSCI Platinum Index TR ,FTSE Bursa Malaysia KLCI Index - Kuala Lumpur Composite Index, Korea Stock Exchange KOSPI Index, Straits Times Index STI.

On Goldhub.com see: Gold volatility
 

 

Enhanced portfolio performance

Long-term returns, liquidity and effective diversification all benefit overall portfolio performance. In combination, they suggest that the addition of gold can materially enhance a portfolio’s risk-adjusted returns. 

Our analysis of investment performance over the past one, five, 10 and 13.5 years underlines gold’s positive impact on an institutional portfolio. It shows that the Singapore average portfolio would have achieved higher risk-adjusted returns and lower drawdowns if 2%, 5%, 7.5% or 10% were allocated to gold (Chart 13 and Table 1). This positive impact has been particularly marked since the GFC.

In addition to traditional back-testing, a more robust optimisation analysis based on ‘re-sampled efficiency’20  suggests that an allocation to gold may result in a material enhancement to portfolio performance. For example, gold allocations between 9.5% and 16% across well-diversified Singapore-based institutional portfolios with varying levels of risk could result in higher risk-adjusted returns (Chart 14, p10).

The ‘optimal’ amount of gold varies according to individual asset allocation decisions. Broadly speaking, the analysis suggests that the higher the risk in the portfolio – whether in terms of volatility, illiquidity or concentration of assets – the larger the required allocation to gold, within the range in consideration, to offset that risk (Chart 14, p10).

Our analysis also indicates that gold’s optimal weight in these hypothetical portfolios can be statistically significant even if investors assume an annual return for gold of between 2% and 4% – well below long-term historical performance. This works equally for investors who already hold other inflation-hedging assets, such as inflation-linked bonds,21 and for investors who hold alternative assets, such as real estate, private equity and hedge funds.22

 

Chart 13: Adding gold over the past decade would have increased risk-adjusted returns of a hypothetical Singapore-based institutional investment portfolio

Adding gold over the past decade would have increased risk-adjusted returns of a hypothetical Singapore-based institutional investment portfolio

Performance of a hypothetical Singapore-based institutional average portfolio with and without gold*

Adding gold over the past decade would have increased risk-adjusted returns of a hypothetical Singapore-based institutional investment portfolio
Performance of a hypothetical Singapore-based institutional average portfolio with and without gold*
"*Based on the total return indices in US dollars of benchmarks listed below. Time period used for analysis, 31 January 2007 - 30 June 2020, is limited by availability of APAC data. Monthly rebalancing. **Risk adjusted return defined as portfolio return divided by annualised volatility. The composition of the hypothetical average portfolio is based on a survey conducted by the Monetary Authority of Singapore for FY 2018. It includes total returns in USD for a 46% allocation to stocks (12.9% MSCI AC ASEAN, 21% MSCI AC APAC, 6.6% MSCI N. America, 5.6% MSCI Europe), 9.7% allocation to sovereign bonds (7.13% S&P Pan Asia Govt Bonds, 1.4% Barclays US Treasuries, 1.2% S&P Eurozone Sovereign Bonds),17.3% allocation to corporate bonds (12.7% S&P Pan Asia Corporate Bonds, 4.6% Barclays Global Aggregate Corporate Bonds), 7.4% allocation to private equity (S&P Listed Private Equity Index), 6.1% allocation to hedge funds (HFRI Fund Weighted Composite Index), 3.7% allocation to real estate and REITs (6.45% MSCI AC APAC Real Estate Index, 1.25% FTSE Nareit Equity REITs, 1.06% FTSE EPRA Nareit Developed Europe Index), 0.21% allocation to venture capital (Thomson Reuters Venture Capital Index) and 4.5% allocation to cash (3.31% S&P Pan Asia Govt Bill Index, 0.64% Barclays US Treasury Bills Index, 0.54% FTSE MTS Eurozone Govt Bills 0-12Mth Index). Gold’s performance is based on the LBMA Gold price in USD and the respective 2%, 5%, 7.5% and 10% portfolio allocations come from proportionally reducing all assets. Source: Bloomberg, ICE Benchmark Administration, MSCI, FTSE Russell, S&P Dow Jones Indices, World Gold Council.

Sources: Bloomberg, FTSE Russell, ICE Benchmark Administration, , S&P Dow Jones Indices, World Gold Council; Disclaimer

"*Based on the total return indices in US dollars of benchmarks listed below. Time period used for analysis, 31 January 2007 - 30 June 2020, is limited by availability of APAC data. Monthly rebalancing.     
**Risk adjusted return defined as portfolio return divided by annualised volatility. The composition of the hypothetical average portfolio is based on a survey conducted by the Monetary Authority of Singapore for FY 2018. It includes total returns in USD for a 46% allocation to stocks (12.9% MSCI AC ASEAN, 21% MSCI AC APAC, 6.6% MSCI N. America, 5.6% MSCI Europe), 9.7% allocation to sovereign bonds (7.13% S&P Pan Asia Govt Bonds, 1.4% Barclays US Treasuries, 1.2% S&P Eurozone Sovereign Bonds),17.3% allocation to corporate bonds (12.7% S&P Pan Asia Corporate Bonds, 4.6% Barclays Global Aggregate Corporate Bonds), 7.4% allocation to private equity (S&P Listed Private Equity Index), 6.1% allocation to hedge funds (HFRI Fund Weighted Composite Index), 3.7% allocation to real estate and REITs (6.45% MSCI AC APAC Real Estate Index, 1.25% FTSE Nareit Equity REITs, 1.06% FTSE EPRA Nareit Developed Europe Index), 0.21% allocation to venture capital (Thomson Reuters Venture Capital Index) and 4.5% allocation to cash (3.31% S&P Pan Asia Govt Bill Index, 0.64% Barclays US Treasury Bills Index, 0.54% FTSE MTS Eurozone Govt Bills 0-12Mth Index). Gold’s performance is based on the LBMA Gold price in USD and the respective 2%, 5%, 7.5% and 10% portfolio allocations come from proportionally reducing all assets. 

 

Table 1: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns

Comparison of a hypothetical Singapore average portfolio and an equivalent portfolio with 7.5% gold over the past one, five, 10 and 13.5 years based on US dollar returns*

  13.5-year* 10-year 5-year 1-year
  No gold 7.5% gold No gold 7.5% gold No gold 7.5% gold No gold 7.5% gold
Annualised return 6.6% 7.1% 8.8% 8.7% 5.3% 5.9% 2.1% 4.0%
Annualised volatility 10.7% 10.1% 8.6% 8.2% 8.9% 8.3% 11.0% 10.3%
Risk-adjusted returns 0.61 0.70 1.03 1.06 0.60 0.71 0.20 0.39
Maximum drawdown -47.3% -43.8% -24.6% -22.9% -24.6% -22.9% -24.6% -22.9%

*As of 30 June 2020. The hypothetical average portfolio and weights are based on Willis Towers Watson Global Pension Assets Study 2019 and Global Alternatives Survey 2017 and as described in Chart 13. Risk-adjusted returns are calculated as the annualised return/annualised volatility. Maximum drawdown is calculated as the largest fall in a portfolio before the total value reaches a previous peak. 

Source: Bloomberg, ICE Benchmark Administration, World Gold Council"

 

Chart 14: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

(a) Long-run optimal allocations based on asset mix*

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
(a) Long-run optimal allocations based on asset mix*
*Based on monthly total returns from 31 January 2007 to 30 June 2020 of MSCI: AC ASEAN, AC APAC, N. America, Europe, S&P Pan Asia Govt Bonds, Barclays US Treasuries, S&P Eurozone Sovereign Bonds, S&P Pan Asia Corporate Bonds, Barclays Global Aggregate Corporate Bonds, S&P Listed Private Equity Index, HFRI Fund Weighted Composite Index, MSCI AC APAC Real Estate Index, FTSE Nareit Equity REITs, FTSE EPRA Nareit Developed Europe Index, Thomson Reuters Venture Capital Index, S&P Pan Asia Govt Bill Index, Barclays US Treasury Bills Index and FTSE MTS Eurozone Govt Bills 0-12Mth Index. Each hypothetical portfolio composition is roughly equivalent to the portfolio in Chart 13. That portfolio reflects a percentage in stocks (Eqty - ASEAN, APAC, N. America and Europe stock indices), alternative assets (Alts - REITs, hedge funds, private equity and venture capital), cash and bonds (FI & cash - ASEAN, APAC, N. America and Europe sovereign and corporate bonds and bills). For example: ‘Average portfolio’ is a portfolio with 42% in stocks, 18% in sovereign bonds and cash, 18% in corporate bonds and 22% in REITs, hedge funds, private equity and venture capital. Time period chosen for analysis limited by availability of APAC data. Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*Based on monthly total returns from 31 January 2007 to 30 June 2020 of MSCI: AC ASEAN, AC APAC, N. America, Europe, S&P Pan Asia Govt Bonds, Barclays US Treasuries, S&P Eurozone Sovereign Bonds, S&P Pan Asia Corporate Bonds, Barclays Global Aggregate Corporate Bonds, S&P Listed Private Equity Index, HFRI Fund Weighted Composite Index, MSCI AC APAC Real Estate Index, FTSE Nareit Equity REITs, FTSE EPRA Nareit Developed Europe Index, Thomson Reuters Venture Capital Index, S&P Pan Asia Govt Bill Index, Barclays US Treasury Bills Index and FTSE MTS Eurozone Govt Bills 0-12Mth Index. Each hypothetical portfolio composition is roughly equivalent to the portfolio in Chart 13. That portfolio reflects a percentage in stocks (Eqty - ASEAN, APAC, N. America and Europe stock indices), alternative assets (Alts - REITs, hedge funds, private equity and venture capital), cash and bonds (FI & cash - ASEAN, APAC, N. America and Europe sovereign and corporate bonds and bills). For example: ‘Average portfolio’ is a portfolio with 42% in stocks, 18% in sovereign bonds and cash, 18% in corporate bonds and 22% in REITs, hedge funds, private equity and venture capital.
Time period chosen for analysis limited by availability of APAC data

 

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

(b) Range of gold allocations and the allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix*

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
(b) Range of gold allocations and the allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix*
*Based on monthly total returns from 31 January 2007 to 30 June 2020 of MSCI: AC ASEAN, AC APAC, N. America, Europe, S&P Pan Asia Govt Bonds, Barclays US Treasuries, S&P Eurozone Sovereign Bonds, S&P Pan Asia Corporate Bonds, Barclays Global Aggregate Corporate Bonds, S&P Listed Private Equity Index, HFRI Fund Weighted Composite Index, MSCI AC APAC Real Estate Index, FTSE Nareit Equity REITs, FTSE EPRA Nareit Developed Europe Index, Thomson Reuters Venture Capital Index, S&P Pan Asia Govt Bill Index, Barclays US Treasury Bills Index and FTSE MTS Eurozone Govt Bills 0-12Mth Index. Each hypothetical portfolio composition is roughly equivalent to the portfolio in Chart 13. That portfolio reflects a percentage in stocks (Eqty - ASEAN, APAC, N. America and Europe stock indices), alternative assets (Alts - REITs, hedge funds, private equity and venture capital), cash and bonds (FI & cash - ASEAN, APAC, N. America and Europe sovereign and corporate bonds and bills). For example: ‘Average portfolio’ is a portfolio with 42% in stocks, 18% in sovereign bonds and cash, 18% in corporate bonds and 22% in REITs, hedge funds, private equity and venture capital. Time period chosen for analysis limited by availability of APAC data. Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*Based on monthly total returns from 31 January 2007 to 30 June 2020 of MSCI: AC ASEAN, AC APAC, N. America, Europe, S&P Pan Asia Govt Bonds, Barclays US Treasuries, S&P Eurozone Sovereign Bonds, S&P Pan Asia Corporate Bonds, Barclays Global Aggregate Corporate Bonds, S&P Listed Private Equity Index, HFRI Fund Weighted Composite Index, MSCI AC APAC Real Estate Index, FTSE Nareit Equity REITs, FTSE EPRA Nareit Developed Europe Index, Thomson Reuters Venture Capital Index, S&P Pan Asia Govt Bill Index, Barclays US Treasury Bills Index and FTSE MTS Eurozone Govt Bills 0-12Mth Index. Each hypothetical portfolio composition is roughly equivalent to the portfolio in Chart 13. That portfolio reflects a percentage in stocks (Eqty - ASEAN, APAC, N. America and Europe stock indices), alternative assets (Alts - REITs, hedge funds, private equity and venture capital), cash and bonds (FI & cash - ASEAN, APAC, N. America and Europe sovereign and corporate bonds and bills). For example: ‘Average portfolio’ is a portfolio with 42% in stocks, 18% in sovereign bonds and cash, 18% in corporate bonds and 22% in REITs, hedge funds, private equity and venture capital.
Time period chosen for analysis limited by availability of APAC data

Conclusion

Perceptions of gold have changed substantially over the past two decades, reflecting increased wealth in the East and a growing worldwide appreciation of gold’s role within an institutional investment portfolio. 
Gold’s unique attributes as a scarce, highly liquid, and un-correlated asset demonstrate that it can act as a diversifier over the long term. Gold’s position as an investment and a luxury good has allowed it to deliver average returns of nearly 11% over the past 50 years, comparable to equities and more than bonds and commodities.26, 27

Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. But gold’s dual appeal as an investment and a consumer good means it can generate positive returns in good times too. This dynamic is likely to continue, reflecting ongoing political and economic uncertainty, persistently low interest rates and economic concerns surrounding equity and bond markets. 

Overall, extensive analysis suggests that adding between 9.5% to 16% of gold to a Singapore-based portfolio can make a tangible improvement to performance and boost risk-adjusted returns on a sustainable, long-term basis.29 
 

The strategic case for gold in Singapore

A major financial and shipping hub, Singapore stands out in developing ASEAN.30 GDP per capita has nearly tripled in the last 20 years and Singapore now ranks as one of the most prosperous nations in the world.31 But risks and challenges remain, even for Singapore.32

An uncertain growth outlook

Singapore’s economy contracted less than expected in 2020. Full-year GDP fell 5.8% against initial estimates of a 5% to 7% contraction. Competent management of the COVID-19 pandemic, substantial fiscal and monetary support and a strong rebound in the manufacturing sector contributed to the better than expected results and the economy is now forecast to expand by 4% to 6% in 2021, the most in a decade. 

While Singapore managed to end its worst year of economic performance on an optimistic note, the path ahead remains clouded with uncertainty. COVID-19 infections continue to soar overseas and a re-emergence of outbreaks in Singapore could spell renewed restrictions. The vaccine rollout could also encounter problems and the virus could mutate and hinder efforts to contain it. A worsening of the COVID-19 situation would not only dampen business and consumer confidence, but also derail the economic recovery in Singapore.

In addition, a slower than expected recovery in major economies would lead to renewed pressures on corporate and financial sector balance sheets and spark capital outflows from emerging economies.33 ASEAN economies are already prone to capital outflows, given current account vulnerabilities, and further outflows could trigger a negative feedback loop and derail economic recovery in the region. 

Trade tensions and geopolitical uncertainty

Beyond the pandemic, trade-reliant Singapore is deeply vulnerable to ongoing geopolitical uncertainty. Further deterioration in US-China relations could generate considerable friction in ASEAN and prompt a slowdown in global demand. Singapore is not immune to capital outflows typically seen in ASEAN at such times and a global flight-to-safety could provoke a broad decline in Singapore dollar-denominated assets. 

An ageing population

In the long run, an ageing population is expected to impose further pressure on Singapore’s public finances. Sovereign wealth funds, which contribute to the national budget, will almost certainly need to take on riskier, illiquid investments to finance growing government expenditure.34 Meanwhile, financial institutions will also have to adopt riskier asset allocations to support profitability. An ageing population entails a higher level of savings and a lower demand for investments. This will place downward pressure on asset prices and perpetuate a low-yield environment.

Navigating the risks in ASEAN and the rest of Asia

As a financial hub, Singapore is often seen as a gateway to ASEAN and the rest of Asia. According to the Monetary Authority of Singapore’s 2018 Asset Management Survey, 75% of total AUM managed in Singapore were sourced from outside the country and 67% of total AUM were invested into ASEAN and the broader APAC region. Singapore-based investors thus need to be mindful of the risks and challenges in ASEAN, such as fluctuating currencies from current account vulnerabilities, volatile commodity prices and geopolitical uncertainties. In addition, the possibility of a reflation trend in the latter part of the year would impose considerable risks on ASEAN sovereign bonds, which usually have relatively high foreign ownership. 

The role of gold

Consumers in Singapore have long recognised the benefits of gold. Per capita gold consumption is among the highest in the world and, within Asia, second only to Hong Kong.35 However, institutional investors also stand to benefit from allocating a proportion of their portfolio to gold. 

With a young, increasingly well-educated workforce and an expanding middle class, ASEAN is expected to see five of its member states move into the world’s 25 largest economies by 2050.36

However, ASEAN’s rosy outlook is not devoid of risk. Even before COVID-19, growth was expected to slow in the years ahead, and current account balances have weakened since the financial crisis.37 Dependence on trade and commodity exports also subject the region to trade tensions and volatile commodity prices. Fragile domestic politics and geopolitical stress create another layer of uncertainty.

Indonesia 

Indonesia is heavily dependent on foreign capital to finance its current account and fiscal deficits. This leaves the rupiah exposed to capital reversals – which could arise during tighter global financial conditions – trade tensions, slower than expected growth in China and soft market sentiment. Indonesia is also a net importer of oil, leaving the current account and rupiah vulnerable to higher oil prices.38

Malaysia

As an open economy, Malaysia is vulnerable to trade uncertainties and slower growth among its trading partners. Oil-related revenue constitutes almost 20% of government revenue, and external and household debts are high compared to peer economies.39  This exposes ringgit and ringgit-denominated assets to volatile swings in commodity prices, as well as fiscal and financial risks. 

Vietnam

One of the fastest growing countries in ASEAN, Vietnam is not without risk. Foreign reserves are low causing the Vietnamese dong, which is loosely pegged to the US dollar, to be vulnerable to speculative pressure during episodes of systematic risk, such as the COVID-19 pandemic and escalating trade tension. In the long run, Vietnam has a 20-year window before rapid ageing sets in. The country is also particularly vulnerable to global climate change.4041

Thailand

Thailand’s healthy current account surplus and accumulating reserves have come at the cost of a strong Thai baht. This has increased labour costs and raised concerns about long-term competitiveness. Even before the pandemic, real GDP growth had been lagging peer economies, while employment, inflation, investments and productivity growth have been in steady decline. Like Malaysia, the country has high household debts and it is vulnerable to trade uncertainties, slower growth among trading partners and an ageing population.42

The Philippines

Despite being one of the best performing economies in the region, the Philippines suffers from a rising current account deficit. This exposes the Peso to the risk of depreciation, which could heighten as the COVID-19 pandemic reduces tourist arrivals and cripples 25% of the economy.43 The Philippines is also particularly prone to natural disasters that affect food production and damage property. 44

The relevance of gold

Investing in ASEAN involves risks that are common to the region but unique to each country. For investors looking to participate in ASEAN’s growth potential, gold can make a valuable contribution to a portfolio. As a safe-haven asset, gold is potentially an attractive alternative to local government bonds, which can be illiquid and prone to capital outflows. It is also a hedge against volatile commodity prices and performs well when natural disasters occur.

1Oxford Economics is a leader in global forecasting and quantitative analysis and a specialist in modelling. Visit QaurumSM for important disclosures about Oxford Economics’ data, as well as a detailed description of the available scenarios; the assumptions underlying and data used for each scenario; and its respective hypothetical impact on gold demand, supply and performance.

2Mercer European Asset Allocation Insights 2020, August 2020

3Refinitiv, How do ESG scores relate to financial returns, August 2020.

4Gold and climate change: Current and future impacts, October 2019

5An institutional investor holds and/or manages assets for clients in larger, pooled portfolios often represented as mutual funds, banks, brokerages, hedge funds, etc.

6Willis Towers Watson, Global Pension Assets Study 2021, February 2021 and Global Alternatives Survey 2017, July 2017.

7Returns in Singapore dollars from 31 December 2000 to 31 December 2020..

8See Chart 13 on p9 for more details behind the composition of the hypothetical Singapore-based average portfolio. Based on 2000 – 2020. In addition, refer to important disclaimers and disclosures at the end of this report.

9January 1971 – December 2020.

10During the gold standard, the US dollar was backed by gold, and the foreign currency exchange rates were dictated by the Bretton Woods System. In August 1971, the Nixon Administration announced the halt of the free conversion between the US dollar and gold catalysing the collapse of the gold standard and, subsequently, the Bretton Woods system.

11For other return metrics and performance see Appendix II on page 17.

12See Chart 18a, on page 15.

13The compounded annual growth rate of gold since 1990 in the domestic currencies of the aforementioned countries are in the range of 3.36% to 11.93%, outpacing the compounded annual growth of inflation in the respective countries that are in the range of 1.65% to 9.92%. IMF, Bloomberg, World Gold Council.

14Oxford Economics, The impact of inflation and deflation on the case for gold, July 2011.

15Ibid footnote 10.

16From 31 December 2000 – 31 December 2020. See the Demand and Supply section at Goldhub.com.

17For more information please see The impact of monetary policy on gold and It may be time to replace bonds with gold.

18Based on the LBMA Gold Price PM from 1 December 2007 to 27 February 2009.

19Based on the LBMA Gold Price PM from 1 October 2018 to 27 December 2018 and from 31 January 2020 to 31 March 2020.

20Re-sampled efficiency is a methodology developed by Richard and Robert Michaud and praised as a robust alternative to traditional mean-variance optimisation. See Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation, Oxford University Press, January 2008.

21Gold as a tactical inflation hedge and long-term strategic asset, July 2009, July 2009.

22Enhancing the performance of alternatives with gold, February 2018.

23See: Gold: the most effective commodity investment, and Gold: metal by design, currency by nature, Gold Investor, Volume 6, June 2014.

24For more information on the gold weight increases see: Major commodity indices will increase gold weightings for a second year in a row.

25Gold: the most effective commodity investment, September 2019.

26Average annualised returns in US dollars from January 1971to December 2020.

27See Chart 22 p17.

28The Greenhouse Gas Protocol, Ecoinvent database. Please see Gold and climate change: Current and future impacts and Gold and climate change: An introduction.

29See Chart 13, p9.

30Association of Southeast Asian nations.

31According to the World Bank, Singapore’s GDP per capita grew from US$23,852 in 2000 to US$65,233 in 2019, the 14th highest in the world.

32IMF country report no. 19/233 – Singapore 2019 Article IV.

33Ministry of Trade and Industry, Singapore.

34Sovereign wealth funds GIC and Temasek both contribute to the national budget. Contribution to the budget has grown from 12.7% in 2013 to 19.7% in 2020. (Data.gov.sg). According to the IMF, Singapore’s healthcare spending is expected to double by 2050 to 8% of GDP.

35As of 31 December 2019. For more details, see the Demand and Supply section at Goldhub.com.

36PWC, The World in 2050 - The long view: how will the global economic order change by 2050?

37OECD, Economic Outlook for Southeast Asia, China and India 2020

38IMF country report 19/250 – Indonesia, 2019 Article IV

39IMF country report 20/57 – Malaysia, 2019 Article IV

40Sustainable Development Department, Vietnam Country Office, "The World Bank: Climate-Resilient Development in Vietnam: Strategic Directions for the World Bank", January 2011.

41IMF country report no. 19/235 – Vietnam, 2019 Article IV

42IMF country report no. 19/309 – Thailand, 2019 Article IV

43According to the World Travel and Tourism Council (WTTC), tourism and travel contributed 25% to the Philippines’ GDP in 2019, the most in ASEAN-6 countries.

44IMF country report no. 20/36 – Philippines, 2019 Article IV

45OECD, Economic Outlook for Southeast Asia, China and India 2020.

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Note that the resulting performance of various investment outcomes that can 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. Diversification does not guarantee investment returns and does not eliminate the risk of loss.  World Gold Council and its affiliates and subsidiaries (collectively, “WGC”) provide no warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.

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