Why gold, why now
Gold is becoming more mainstream. Since 2001, investment demand for gold worldwide has grown, on average, 15% per year. This has been driven in part by the advent of new ways to access the market, such as physical gold-backed exchange-traded funds (ETFs), but also by the expansion of the middle class in Asia and a renewed focus on effective risk management following the 2008–2009 global financial crisis. Additionally, central banks have turned from net sellers to net buyers of gold as part of their foreign reserves, a change of approximately 1,000 tonnes.
Today, gold is more relevant than ever for investors. While central banks in developed markets are moving to normalise monetary policies – leading to higher interest rates – we believe that investors may continue to feel the effects of quantitative easing and the prolonged period of low interest rates for years to come.
These policies may have fundamentally altered what it means to manage portfolio risk and could extend the time needed to meet investment objectives.
In response, institutional investors have embraced alternatives to traditional assets such as stocks and bonds. The share of non-traditional assets among global pension funds has increased from 15% in 2007 to 25% in 2017.1
Many investors are drawn to gold’s role as a diversifier due to its low correlation to most mainstream assets and as a hedge against systemic risk and strong stock market pullbacks. Some use it as a store of wealth and as an inflation and currency hedge. In Japan particularly, gold has acted as a safe haven in times of market stress, including periods of heightened uncertainty since the Brexit referendum.
As a strategic asset, gold has historically improved the risk-adjusted returns of portfolios, delivering returns while reducing losses and providing liquidity to meet liabilities in times of market stress (Chart 6).
A source of returns
Gold is not only useful in periods of higher uncertainty. Its price in yen has increased by an average of 8.2% per year since 1971 when gold began to be freely traded following the collapse of Bretton Woods. And gold’s long-term returns have been comparable to stocks and higher than bonds or commodities (Chart 1).2
There is a good reason behind gold’s price performance: it trades in a large and liquid market, yet it is scarce.
Mine production has increased by an average of 1.4% per year for the past 20 years. At the same time consumers, investors and central banks have contributed to higher demand, and this diversity of demand has become a key strength.3
On the consumer side, the combined share of global gold demand from India and China has grown from 25% in the early 1990s to more than 50% in recent years.4
Our research shows that expansion of wealth is one of the most important drivers of gold demand over the long run. It has had a positive effect on jewellery, technology, and bar and coin demand – the latter in the form of long-term savings.5