Gold Investor: risk management and capital preservation - Volume 3

Published 31st July 2013

Categories: Investment

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Aram Shishmanian

CEO World Gold Council

Welcome to the third edition of Gold Investor. We are pleased to share a selection of the latest research from the World Gold Council. 

The first half of this year proved a tumultuous one for the gold market. Sustained downward pressure on the gold price following April’s exceptional pullback created two distinct trends: some investors and speculators took the drop in price as a sign that gold’s bull run was probably over; other investors and consumers saw an opportunity to buy jewellery and add gold to their portfolios. 

 

Gold-backed ETFs experienced substantial redemptions, but at the same time bar and coin demand in Asian markets as well as in many parts of the Western world surged. 

The dichotomy seen in the responses of market participants highlights gold’s varied consumer and investor base, which in turn points out gold’s role as a portfolio diversifier. In fact, the strategic case for owning gold is still very much in place, and given its price pullback, investors can take advantage of the portfolio benefits gold brings at a lower cost. Gold helps investors preserve capital and manage portfolio risk more effectively. It increases portfolio diversification through its lower correlation to other assets; reduces portfolio losses during tail-risk events; adds a high quality, liquid asset; hedges against both high inflation and deflation; and hedges against currency risk and loss of purchasing power. 

In this edition of Gold Investor, we first explore the oft-cited relationship between gold and real interest rates in Gold and US interest rates: a reality check. Common wisdom suggests that rising interest rates diminish the benefits of gold – a reason used by some investors to reduce their gold exposure earlier in the year. Our analysis finds, however, that while negative real rates have indeed coincided with periods of higher gold returns, a moderate interest rate environment (with real rates ranging between 0% and 4%) is not necessarily adverse for gold and that gold’s portfolio benefits are maintained. Next, in What drives gold?, we discuss the main factors that influence gold and provide investors with a broad framework to analyse its performance. Finally, in The role of gold in de ned-contribution plans, we discuss the role gold plays in helping investors achieve their retirement goals, using Mexico’s de ned-contribution pension system as an example. This article finds that modest allocations to gold – ranging from 1% to 7%, depending on market performance expectations and portfolio composition – can significantly reduce risk without diminishing returns. 

I hope you find this edition of Gold Investor informative and stimulating, and I welcome your views. To access the full suite of World Gold Council research, please visit www.gold.org