There’s a good reason the lexicon refers to apex happenings, events or organisations as setting the “gold standard”. Gold holds its own for multiplicitous reasons: as a luxury good, an investment, a reserve asset and, increasingly, as an indispensable technological component. It’s highly liquid, no one’s liability, carries no credit risk, is scarce and historically it preserves its value over time. The Chinese in bygone dynasties espoused the efficacious nature of gold and even considered it offered “immortality”.
When it comes to contemporary finance and dynamising your portfolio, gold may be a less-frequented commodity, but it’s an asset that repays investor loyalty like few others.
There’s a quartet of ways in which gold works for you as an investor: it generates long-term returns; acts as a diversifier and mitigates losses in times of market stress, provides liquidity with no credit risk and can also improve overall portfolio performance.
The World Gold Council estimates that adding between 2 and 10 percent in gold to a hypothetical US pension fund average portfolio over the past decade would have resulted in higher risk-adjusted returns.
Economic expansion is good news for gold, as periods of growth are supportive of jewellery, technology and long-term savings. Conversely, risk and uncertainty also works in gold’s favour, as market downturns often boost investment demand for gold as safe haven.
Last year, gold had its best performance since 2010, rising by 18.4 percent in US-dollar terms. It also outperformed major global bond and emerging-market stock benchmarks over the same period. In addition, gold reached record highs in most major currencies except the US dollar and the Swiss franc. Investor appetite for gold was apparent throughout the year, as seen by strong ETF flows and robust central-bank demand.
But what about the start of the new decade and beyond? Despite the global pandemic and COVID-19, gold was – until recently – one of the few assets with positive returns this year. It was up 10 percent on the year as of March 9, more than any other major asset class.
But setbacks in its performance aren’t without precedent. Gold experienced pullbacks at the onset of the global financial crisis, too, falling between 15 and 25 percent in US-dollar terms a couple of times during 2008. But by the end of that year, gold was one of the few assets – alongside US treasuries – to post positive returns.
Investors face an expanding list of challenges around asset-management and portfolio construction. Among them are low interest rates, which may push investors to seek riskier assets at elevated valuation levels and, for US pension funds in particular, may increase the value of liabilities, possibly reducing their funding ratio. Other concerns will be continued financial- market uncertainty, ranging from geopolitical tensions to expectations of diverging global economic growth and an increase in asset volatility.
Faced with the above, gold is not only a useful long-term strategic component for portfolios, but also one that’s increasingly relevant in the current environment.
David Tait, chief executive officer at the World Gold Council, commented: “The retail gold market is healthy, with gold being considered a mainstream choice. But what really excites me is the untapped part of the market: those people who’ve never bought gold but are warm to the idea of doing so in the future.
“Two issues need to be addressed to engage with these potential gold buyers: trust and awareness. This market can flourish if we can build trust across the broad spectrum of gold products being sold, and raise awareness around the positive role gold can play in protecting people’s wealth.”
Buying and Investing in Gold
Once you take the decision to buy or invest in the precious metal, which declension best suits your needs?
Physical Gold Bars
Small bars and coins have accounted for two-thirds of annual investment gold demand and around one quarter of global gold demand over the past decade. Demand for diamond bars and coins has quadrupled since the early 2000s, and the trend covers both the East and the West. New markets, such as China, have been established and old markets, including Europe, have re-emerged.
Physically backed gold exchange-traded funds (ETFs), exchange-traded commodities (ETCs) and similar funds account for approximately one-third of investment gold demand. These funds were introduced in 2003, and, as of March 2016, they collectively held 2,300 tonnes of physical gold on behalf of investors around the world.
Allocated Gold Accounts
Bullion banks offer their institutional or high-net-worth customers allocated gold accounts consisting of gold deposits and resembling currency acounts. The holder of an allocated account is the legal owner of a specific quantity of gold. Bullion banks also offer unallocated accounts. In an unallocated account, a customer does not own specific bars or coins, but has a general entitlement to a set amount of gold. The investor is not the legal owner of any physical gold.
Internet Investment Gold
Or go digital with your gold investment. An increasingly common way of accessing the gold market is Internet Investment Gold (IIG). It allows investors to buy physical gold online, have it stored in professional vaults and take possession of it should the need arise. As such, IIG offers investors a highly convenient way to benefit from outright ownership of physical gold.
Gold Derivatives: Futures, Forwards and Options
Investing in derivatives requires more knowledge of financial securities than other forms of investing and may not be suitable for all investors. Derivatives trade over-the-counter and on exchanges. Those traded in such a way settle in a central clearing house that matches buyers and sellers. Over-the-counter (OTC) varieties have more flexible structures but include additional counterparty risk.
Investors could buy into gold-mining companies. Such stocks may correlate with the gold price. However, the growth and return in stock depends on the expected future earnings of the company, not just on the value of gold. So whichever declension of investment you take, let your future be one long golden moment.