Report

16 March, 2022

The strategic role of gold in the portfolio of Singapore-based investors

Singapore is home to a wide range of cultures, religions and ethnicities but its diversity is not limited to its people. Attracted by the city-state’s pro-business environment and highly skilled workforce, asset managers and investors from around the world have come to regard Singapore as the gateway to ASEAN and the Asia Pacific. 

According to the Monetary Authority of Singapore’s 2020 Asset Management Survey, 78% of the funds managed in Singapore were sourced from outside the country. Of the funds managed, 68% were invested in Asia Pacific, while ASEAN countries also remained key investment destinations, making up 33% of the investments in APAC. 

The typical Singapore-based investor is thus presented with the risks and challenges associated with an APAC-focused portfolio that includes sizeable exposure to emerging market (EM) Asia assets. 

The role of gold in an APAC and ASEAN-heavy portfolio

The performance of gold and EM assets has historically been linked to the direction of the US dollar. 

EM economies tend to have debts denominated in US dollars and many require foreign inflows to fund fiscal and/or current account deficits. When US interest rates are high and the dollar strong, EM economies run the risk of incurring higher borrowing costs. Furthermore, capital outflows can place EM assets under pressure.1

At the same time a stronger US dollar diminishes gold’s attractiveness as an alternative store of value and can render it more expensive in other currencies, leading to a decline in demand. 

Gold and EM assets thus share a small but positive correlation through their relationships with the US dollar. However, this positive correlation is not consistent across all market environments, especially during periods of market turmoil, and gold can continue to play an important role in a portfolio that is heavily weighted towards EM Asia assets. (Chart 2)

A positive correlation that works

The positive correlation between gold and EM assets extends beyond their shared relationship with the US dollar, especially over the long run. In EM Asian countries where there is a high affinity for gold as jewelry and investment, economic growth is a key driver of gold demand. In India, our analysis shows that for every 1% increase in income, gold demand is expected to increase by 0.9%.2 Likewise in China, gold consumption is closely linked to local economic performance and the 8.1% y-o-y GDP growth in 2021 was seen as key in supporting the 55% y-o-y rise in Chinese gold consumption.3

ASEAN investments similarly have tremendous potential for growth due to demographic and economic trends and play an important role in asset allocation as a source of return. However, these investments usually carry risks and come with higher volatility. Gold’s link to rising income means that it can capture ASEAN’s growth upside without the accompany risk and volatility and thus improve portfolio performance. 

A safe-haven counterweight to risky EM assets 

Gold and EM Asia assets may share a small but positive correlation through their relationships with the US dollar. However, this correlation is not consistent across all market environments. During periods of systemic risk when the US dollar and Treasuries tend to rise and global equities decline, gold similarly benefits from “flight-to-quality” inflows and can rise alongside a stronger US dollar. (Chart 2)

In a portfolio that is heavily weighted towards EM risk assets, gold’s role as a safe haven is particularly pronounced. EM equities have a beta of 1.14 versus the MSCI World Index,4 and systemic risks that impact global economies can have a larger effect on emerging markets. 

In addition, many EM economies are also exposed to risk stemming from domestic political instability and EM Asia is no different. In Southeast Asia, domestic social unrest in Thailand,5 a military coup in Myanmar and political volatility in Malaysia are examples of events that can weigh on domestic bonds and equities. In addition, volatility in risk assets can be instigated by political elections and several are due in the near future: Philippines (9 May 2022), Malaysia (before July 2023) and Thailand (before Q1 2023).  

Gold is devoid of the political risks embedded in EM assets and can protect the portfolio from depreciating local currencies, as well as offset the decline in risk assets during periods of instability. 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 with high efficacy and low cost (Chart 2).

 

Chart 2: Gold has a negative correlation to global equities during a selloff but a positive correlation when they advance

Gold has a negative correlation to global equities during a selloff but a positive correlation when they advance

Correlation between gold, US dollar index, ASEAN and APAC equity returns in various global equity environments since 2000*

Gold has a negative correlation to global equities during a selloff but a positive correlation when they advance
Correlation between gold, US dollar index, ASEAN and APAC equity returns in various global equity environments since 2000*
*As of 31 December 2021. Correlations computed using weekly returns in US dollars based on the MSCI World Index, MSCI AC ASEAN Index, MSCI Asia Pacific Index, US dollar index and the LBMA Gold Price PM since 31 December 2001. The middle bar corresponds to the conditional correlation when returns are within two standard deviations (or ‘’). The bottom bar corresponds to the correlation conditional on the MSCI World Index weekly return increasing by more than two standard deviations, 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. Source: Bloomberg, MSCI Inc, World Gold Council

Sources: Bloomberg, MSCI Inc, World Gold Council; Disclaimer

* As of 31 December 2021. Correlations computed using weekly returns in US dollars based on the MSCI World Index, MSCI AC ASEAN Index, MSCI Asia Pacific Index, US dollar index and the LBMA Gold Price PM since 31 December 2001. The middle bar corresponds to the conditional correlation when returns are within two standard deviations (or ‘σ’). The bottom bar corresponds to the correlation conditional on the MSCI World Index weekly return increasing by more than two standard deviations, 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.

A hedge against inflation and a source of return in any business cycle

Gold’s dual nature as both a defensive and growth asset has allowed it to generate 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 1971 when the gold standard collapsed.6 In the last two decades gold has outperformed both the MSCI ASEAN and APAC indices and lags only Thailand’s SET index and Indonesia’s Jakarta composite index in ASEAN (Chart 3). 

 

Chart 3: Compounded annual returns of APAC assets and gold*

Compounded annual returns of APAC assets and gold*

Compounded annual returns of APAC assets and gold*
*Returns from 31 December 2001 to 31 December 2021 subject to availability of data. Computations in US dollars of MSCI ASEAN, APAC, Singapore, Malaysia, Philippines, Thailand, Developed Markets, Emerging Markets, Bloomberg Asian Pacific Aggregate Total Return USD Index (Unhedged), Bloomberg EM Asia Local Currency Govt Bonds and LBMA Gold Price PM. Source: Bloomberg, MSCI Inc, World Gold Council

Sources: Bloomberg, MSCI Inc, World Gold Council; Disclaimer

*Returns from 31 December 2001 to 31 December 2021 subject to availability of data. 

Computations in US dollars of MSCI ASEAN, APAC, Singapore, Malaysia, Philippines, Thailand, Developed Markets, Emerging Markets, Bloomberg Asian Pacific Aggregate Total Return USD Index (Unhedged), Bloomberg EM Asia Local Currency Govt Bonds and LBMA Gold Price PM. 

This duality reflects the diverse sources of demand for gold and differentiates it from other investment assets. Gold is often used as a safe-haven asset but is in demand via the jewellery market and is a key component in electronics. These diverse sources of demand give gold a particular resilience: the potential to deliver solid returns in various market conditions.

Gold’s average adjusted quarterly returns across four economic scenarios in the US (‘Goldilocks’, ‘reflation’, ‘stagflation’ and ‘deflation’) exemplify this trait.7 See: Investment Update: Stagflation rears its ugly head. Over the last two decades, the only two major asset classes to provide positive returns across all four economic scenarios are gold and US Treasuries (Chart 4). However, gold provides superior returns and is able to protect the portfolio during periods of stagflation, when risk assets typically underperform. 

 

Chart 4: Major US assets and gold returns in different business cycles*

Major US assets and gold returns in different business cycles*

Major US assets and gold returns in different business cycles*
* Returns from Q2 2001 to Q2 2021. ** AAAR – annualised average adjusted returns – percentage is computed by first taking the square root of the sum of squared changes in both real GDP and inflation for all periods. This can be referred to as the magnitude of the vector of growth and inflation moves. The magnitude of the vector for each business cycle phase is then summed and the weight for each quarterly return is the vector magnitude of that quarter as a proportion of the sum of all vector magnitudes for each business cycle phase. The return in each period is then adjusted by its weight and summed across all periods belonging to the business cycle. Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

* Returns from Q2 2001 to Q2 2021. 

** AAAR - annualised average adjusted returns – percentage is computed by first taking the square root of the sum of squared changes in both real GDP and inflation for all periods. This can be referred to as the magnitude of the vector of growth and inflation moves. The magnitude of the vector for each business cycle phase is then summed and the weight for each quarterly return is the vector magnitude of that quarter as a proportion of the sum of all vector magnitudes for each business cycle phase. The return in each period is then adjusted by its weight and summed across all periods belonging to the business cycle.

While risk assets in Southeast Asia similarly tend to underperform during periods of stagflation, the gold price is unlikely to be significantly impacted by ASEAN macro-conditions as consumer demand from the region makes up less than 7% of the global total.8 However, as domestic currencies also tend to depreciate during a stagflation, gold’s consistent outperformance across business cycles means that it can advance in both US dollar and domestic currency terms (Table 1). Hence gold serves as a form of diversification that can reduce portfolio volatility when macro-conditions change. 

Table 1: AAAR % of various ASEAN assets during their respective business cycles*

Annualised average adjusted returns (%)** Goldilocks Reflation Stagflation Deflation
Jakarta Composite Index 45.71 12.16 25.54 39.73
USDIDR -5.68 2.94 -5.46 -4.58
Gold (IDR) 6.55 11.66 22.43 15.3
Gold (USD) 12.89 9.45 30.05 21.14
         
MSCI Philippines 29.03 3.34 -27.99 45.57
USDPHP 1.42 0.17 0.96 -3
Gold (PHP) 12.8 3.74 12.26 28.62
Gold (USD) 12.47 3.97 10.87 33.75
         
MSCI Thailand 64.8 15.09 -3.69 28.91
USDTHB -2.2 -2.02 3.4 -3.9
Gold (THB) 2 31.42 9.77 3.46
Gold (USD) 4.82 31.85 6.79 9.26
         
MSCI Singapore 63.88 6.08 18.03 -4.54
USDSGD -3.39 -2.03 -7.13 -1.29
Gold (SGD) 1.14 15 6.3 20.89
Gold (USD) 5.17 17.67 14.68 22.94
         
MSCI Malaysia 48.32 11.8 -2.62 14.18
USDMYR -0.42 -4.89 2.69 2.38
Gold (MYR) 7.59 14.9 9.3 30.43
Gold (USD) 8.24 21.14 7.16 27.63

Sources: Bloomberg, World Gold Council

* Returns from Q2 2001 to Q2 2021. Vietnam excluded from comparison due to the lack of quarterly real GDP figures.

** AAAR % - annualised average adjusted returns. See footnote of Chart 5 for more information.

Gold’s outperformance during periods of stagflation gives weight to the argument that gold can be a hedge against inflation, and the data confirms this. See: Investment Update - Beyond CPI: Gold as a strategic inflation hedge. In years when annual inflation rose above the central bank inflation target rate, gold provided higher returns on average in local currencies than in years when annual inflation fell below the target rate (Chart 5). In ASEAN, gold provided superior returns during high inflation years for all regions except Thailand and Singapore. 

In addition, research also shows that gold can do well in periods of disinflation.9 Such periods are characterised by low interest rates, reduced consumption and investment, and financial stress, all of which tend to foster gold demand.

 

Chart 5: Gold is a source of return in periods of both high and low inflation*

Gold is a source of return in periods of both high and low inflation*

Gold is a source of return in periods of both high and low inflation*
*Based on y-o-y changes of the LBMA Gold Price in domestic currencies and consumer prices between 2001 and 2020. Low inflation corresponds to periods when annual inflation was lower than the country’s lower bound inflation target rate. High inflation corresponds to periods when annual inflation was higher than the country’s higher bound inflation target rate. The target inflation level is 4% in Vietnam, 2.5-4% in Malaysia, 2-4% in Philippines, 1-4% in Indonesia, and 1-3% in Thailand. Singapore does not have an explicit inflation target rate but the MAS aims to control core inflation at around 2%. Sources: Bloomberg, IMF, World Gold Council

Sources: Bloomberg, International Monetary Fund, World Gold Council; Disclaimer

*Based on y-o-y changes of the LBMA Gold Price in domestic currencies and consumer prices between 2001 and 2020. 

Low inflation corresponds to periods when annual inflation was lower than the country’s lower bound inflation target rate. High inflation corresponds to periods when annual inflation was higher than the country’s higher bound inflation target rate. The target inflation level is 4% in Vietnam, 2.5-4% in Malaysia, 2-4% in Philippines, 1-4% in Indonesia, and 1-3% in Thailand. Singapore does not have an explicit inflation target rate but the MAS aims to control core inflation at around 2%. 

A source of liquidity amid growing illiquidity

In recent years the portfolio of Singapore-based investors has changed in response to the low-rate environment. In the hunt for yield, investor appetite for real estate and private market investments has grown; as a result, the allocation to alternatives in portfolios has risen from 13% in 2011 to 22% in 2020 (Chart 6). The continued development by the MAS of Singapore as a private market hub has also helped to accommodate growing investor interest in ASEAN’s burgeoning internet economy. Assets managed within the alternatives sector have grown by almost 20% on average since 2014. 

But the increase in alternative investments carries portfolio risks. Although many have helped portfolio performance historically, they usually offer a much lower liquidity profile. Liquidity risk is even more pronounced when we consider that allocation to cash and money market instruments in the portfolio of Singapore-based investors has fallen from 15% in 2011 to 2% in 2020 – and the fall has been in favour of investments in alternatives. 

 

Chart 6: Hypothetical average portfolio allocation of Singapore-based investors

Hypothetical average portfolio allocation of Singapore-based investors

Hypothetical average portfolio allocation of Singapore-based investors
*CIS refers to collective investment schemes. Source: Monetary Authority of Singapore (2020 Singapore Asset Management Survey)

Sources: Monetary Authority of Singapore (2020 Singapore Asset Management Survey); Disclaimer

*CIS refers to collective investment schemes

The low-rate environment has compelled investors to move further out on the credit curve, building higher exposure to risk in the hunt for yield. This change in fixed income positioning increases portfolio volatility and duration risk. When combined with the substantial increase in alternatives at the expense of cash, overall portfolio liquidity becomes poorer. 

The shift towards illiquid riskier assets brings to the fore gold’s merits as a liquid safe-haven asset. In ASEAN, retail consumers have long recognised the benefits of gold as a source of liquidity during crises. In Thailand, for instance, cash-strapped households rushed to sell gold during the COVID-19 pandemic when the price was high.10

Institutional investors also stand to benefit from allocating a proportion of their portfolio to gold. Gold’s average daily trading volume – at US$145bn in 2020 – is almost 10 times that of the combined daily volume of ASEAN-6 equities and government bonds – at approximately US$15bn (Chart 7). The shift to risker and less liquid assets thus strengthens the case for an allocation to gold, given its unique combination as a highly liquid diversifier that can reduce portfolio volatility. See: Investment Update: Increased appetite for less liquid investments strengthens the case for gold.

 

Chart 7: Average daily trading volumes in US dollars

Average daily trading volumes in US dollars

Average daily trading volumes in US dollars
* ASEAN-6 equity average daily volumes correspond to data for the year to Nov 2021 for SGX and IDX, the year to Oct 2021 for PSE, the year to Apr 2021 for HOSE, and FY2021 for Bursa Malaysia and SET. ASEAN-6 govt bonds are for FY2020. Data for other assets are from Dec 2020 to Dec 2021, 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. Shaded area of gold volumes represents the estimated non-reported LBMA trade data. Source: Bloomberg, Bank for International Settlements, UK Debt Management Office (DMO), Germany Finance Agency, Japan Securities Dealers Association, Nasdaq, Asia Development Bank (Asian Bonds Online), Singapore Exchange, Bursa Malaysia, Indonesia Stock Exchange, The Stock Exchange of Thailand, Ho Chi Minh City Stock Exchange, and Philippine Stock Exchange. World Gold Council

Sources: Asian Development Bank, Bloomberg, Bank for International Settlements, Bursa Malaysia, UK Debt Management Office (DMO), Germany Finance Agency, Ho Chi Minh City Stock Exchange and Philippine Stock Exchange, Indonesia Stock Exchange, Japan Securities Dealers Association, Nasdaq, The Stock Exchange of Thailand, Singapore Exchange, World Gold Council; Disclaimer

*ASEAN-6 equity average daily volumes correspond to data for the year to Nov 2021 for SGX and IDX, the year to Oct 2021 for PSE, the year to Apr 2021 for HOSE, and FY2021 for Bursa Malaysia and SET. ASEAN-6 govt bonds are for FY2020. Data for other assets are from Dec 2020 to Dec 2021, 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. Shaded area of gold volumes represents the estimated non-reported LBMA trade data.

Conclusion

Gold plays a unique role in portfolios that have large exposure to APAC and EM Asia assets. 

Over the long run, economic growth is a key driver of gold demand and having a strategic allocation to gold in the portfolio means that it can be used to capture EM Asia’s upside through its link to rising income. 

At the same time, gold can be used to protect the portfolio against systematic risks and in periods of market turmoil, gold can rise alongside a stronger US dollar and help to reduce portfolio volatility and losses. 

Gold also provides stable returns across different business cycles and outperforms during periods of stagflation when risk assets tend to decline. This characteristic is borne out of its dual nature as both a defensive and growth asset, which can perform during good and bad times. 

Finally, gold can provide crucial liquidity during market drawdowns. Set against the trend for greater illiquidity, it is an indispensable asset for any portfolio. 

Focus 1: Gold as an ESG investment

We believe that gold should be viewed as an asset that is responsibly sourced, delivered from a supply chain that adheres to high environmental, social and governance (ESG) standards. Gold also has a potential role to play in reducing investor exposure to climate-related risks.

While gold mining is, by definition, an extractive industry, responsible gold miners mitigate environmental and social risks and contribute heavily to the communities and host countries in which they operate. They do so through the payment of wages and taxes, support of local economic development, improvements to infrastructure, and access to healthcare and schooling, and much more. The majority of this expenditure remains in the local economies of host nations and communities, as documented recently in our measurement of the social and economic contribution of gold mining. The industry is also committed to contributing to the advancement of the UN Sustainable Development Goals.

Our members, as industry leaders, are committed to the Responsible Gold Mining Principles (RGMPs), launched by the World Gold Council in 2019. These principles cover all material aspects of ESG related to gold mining and set clear expectations as to what constitutes responsible gold mining. Conformance with these Principles needs to be publicly disclosed and assured by independent experts.

In addition, we believe gold miners can contribute to the decarbonisation of the global economy and gold, as an asset, can play an important role in mitigating climate-related risks within an investment portfolio.

On a global level, gold’s overall carbon footprint is relatively small but not insignificant (under 0.4% of global emissions). However, the opportunity for the gold supply chain to reduce its total greenhouse gas emissions is well within reach. Research suggests that, unlike many other commodities and sectors, this opportunity is clear and concentrated. Most emissions associated with gold are created during its production, particularly from mining’s generation and consumption of electricity, and significant progress is already being made to reduce these power emissions.

Gold’s lack of downstream emissions has important implications for gold investors, as gold holdings can reduce the carbon intensity of the portfolio value. And the positive outlook for future decarbonisation of the gold value chain has potential benefits for the projected carbon profile, ‘implied temperature’ and climate target alignment of portfolio holdings.

Our analysis suggests that gold has the potential to perform better than many mainstream asset classes under various long-term climate scenarios, particularly if climate impacts create or exacerbate market volatility or we experience a disruptive transition to a net zero carbon economy. Furthermore, gold’s value is less likely to be negatively impacted by a rising carbon price, also offering investors a degree of insulation from the likely policy responses needed to accelerate the move to a decarbonised economy.

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Footnotes

  1. A. Ghosh & U. Ramakrishnan (24 Feb 2020), Current Account Deficits: Is There a Problem? International Monetary Fund.

  2. The drivers of Indian gold demand: India gold market series. (19 Oct 2021), World Gold Council.

  3. China's gold market outlook 2022. (23 Feb 2022), World Gold Council

  4. Based on monthly returns from December 2001 to December 2021.

  5. J. Kurlantzick. (2 Sep 2021), Thailand’s protests are a sign of popular anger and desperation. World Politics Review.

  6. January 1971 – December 2021.

  7. Business cycles were defined according to a y-o-y change in quarterly real GDP and inflation. ‘Goldilocks’ refers to a rising real GDP and falling inflation; ‘reflation’ refers to a rising real GDP and inflation; ‘stagflation’ refers to a falling real GDP and rising inflation; ‘deflation’ refers to a falling real GDP and inflation.

  8. Consumer demand refers to the demand for gold jewellery, bars and coins. Data reflects the 10y average ending 2020 and excludes Philippines due to lack of data.

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

  10. Jiraporn Kuhakan & Satawasin Staporncharnchai, (16 April 2020), Cash-strapped Thais rush to sell gold as coronavirus hits economy.

Important disclaimers and disclosures [+]Important disclaimers and disclosures [-]