Gold continues to display its versatile qualities


Kanish Chugh

Gold played a vital role for investors in 2020, providing portfolio insurance during a time of market stress, and now it is displaying its role as an effective diversifier of returns, according to ETF Securities.

The gold price picked up strongly in April, rising more than 5% to US$1,775 an ounce, providing evidence that despite the stronger global economic outlook and rising bond yields, the precious metal still has a role to play in investors’ portfolios.

ETF Securities’ Kanish Chugh says, long-term, gold has been a very rewarding asset to hold.

Since the beginning of 2019, the US dollar price has increased by more than 37 per cent. It was a safe haven asset during the height of the COVID-19 pandemic, just as it has been during previous crises.

It did this during the 1987 sharemarket crash, the 1990 Iraq war, the Russian debt crisis of the late 1990s, the bursting of the dotcom bubble in the early 2000s and the US equity bear market in 2008.

Chugh says that with considerable uncertainty remaining about the resolution of the COVID-19 crisis, gold’s role as portfolio insurance remains vital.

He adds: “One of the biggest investor concerns around the post-COVID recovery is the prospect of a return of inflation, eroding real returns from fixed income and cash holdings. Gold has historically rallied during periods of rising inflation.”

He says it is not just an asset for crises. “Over the past five years, the US dollar gold price has increased by an average of 7.4 per cent a year (7.3 per cent a year in Australian dollars).

Asset allocation analysis suggests that adding 2% to 5% of gold to a portfolio can improve performance and boost risk-adjusted returns on a long-term basis.”

This is because gold has shown consistently low levels of correlation with stocks and bonds over the long term, which means that the addition of gold to a portfolio is often able to improve risk-adjusted returns by adding diversification.

ETF Securities offers exposure to gold through its ETFS Physical Gold exchange traded product (ASX Code: GOLD), which is backed by physical gold held by JP Morgan Chase Bank.

Since it was launched in 2003, GOLD has produced an average return of 7.6% a year, in Australian dollars. In 2020, it rose 12.7 per cent.

Chugh says another factor supporting the continuing strength of the gold price is central bank buying. The world’s central banks have been net buyers since 2010 and there has been very little selling.

“We expect support for gold to be strong in the coming year as interest rates remain at record lows,” notes Chugh.

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