Kanish Chugh
Gold has reconfirmed its role as a safe haven holding for investors in 2022, rising out of the range-bound position it was stuck in for much of 2021 as investors looked for a safe haven in response to the Russian invasion of Ukraine and other global tensions.
Another factor in gold’s recent rise is rising inflation, which is no longer seen as a transitory effect of the post-COVID recovery.
At its current level of around A$2,689 an ounce, gold has gained around 18.6% since its 12-month low in March last year and around 5.3% since it started to climb year to date (28 Feb).
ETF Securities’ Physical Gold ETF (ASX Code GOLD), which is backed by physical gold, returned 5.23 per cent over year to date (as at 28 Feb, 2022).
ETF Securities Head of Distribution, Kanish Chugh, says: “Disruptive geopolitical events usually damage shares and bonds. When turmoil strikes, investors flee risk. The value of bonds and shares are determined by what they’ll do in the future, or by their future cash flows. When investors worry about the future, they naturally ditch assets whose value derives from it.”
Gold is different, often thriving during periods of political or economic unrest. Some recent examples of when gold outperformed shares and bonds include the 9/11 attacks in the United States, Brexit and the onset of COVID-19.
For 30 years, Australian dollar gold has had a negative correlation of -0.36 to international equities like the S&P 500 and a negative correlation of -0.23 to domestic Australian equities like the All Ords. When equities suffer drawdowns, gold historically has held its value more.
Chugh says: “There are good reasons why gold does this. It has a proven history as a safe haven asset. More fundamentally, gold has no cash flows, unlike shares, bonds or property. It cannot be valued based on future cash flows.”
The Russian invasion of Ukraine has triggered another decoupling of gold from other assets.
On the inflation front, commentary has shifted from seeing higher inflation as a transitory effect of the post-COVID recovery to accepting that it is a longer-term shift. The US consumer price index hit 7% in December.
Chugh says: “Higher inflation has historically supported gold. According to the World Gold Council, gold performs best when inflation is above 3%. When inflation rises, the value of paper money declines.
“Gold is known for being unpredictable. For some investors, this is a strength, as it helps ensure gold is an effective diversifier. And as we enter the new year, wearier, and with more dangers lurking, gold could continue providing an important source of diversification in investors’ portfolios.”
Gold is not just an asset for crises.
Since ETFS Physical Gold was launched in 2003, it has returned an average of 8.1% a year and over the past five years it has returned an average of 9.3% a year.
“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,” adds Chugh.
