For Shaokai Fan, head of APAC excluding China at the World Gold Council (WGC), gold presents itself as a portfolio diversification tool, particularly for Australian investors.
“Australia is a large commodity producing country, so there is a feeling or belief that the Australian economy, the Australian dollar, is going to be more synchronized with the commodity cycles and therefore, buying an asset than the “Most people think being a commodity couldn’t be a good thing because it will be aligned with Australia’s economic cycle,” Fan said.
“But one of the messages we’ve tried to get across is that yes, of course Australia is a very large gold producer, but the performance of gold, the financial behavior of it, is actually very different that of other commodities, in fact, that of other commodities of many other assets in general, and this is one of the most attractive elements of holding gold in your portfolio.
“The behavior is so different from that of stocks, fixed income, commodities and even cryptocurrencies, that holding gold helps bring diversification benefits to your portfolio and could help improve long-term risk-adjusted returns.”
Gold’s unique diversification benefits come from its ability to perform well in both procyclical environments – where demand for jewelry and industrial uses increases during economic growth – and countercyclical scenarios, where the Investment demand increases during market uncertainty.
“You have a very mixed bag in terms of different demand factors that influence gold and that lead to very idiosyncratic price action for gold,” he said.
“Gold is a mixture of the two and therefore the price is not really correlated to anything else. It gives you excellent diversification benefits because it works very differently from everything else.
Comparing gold to cryptocurrencies like bitcoin, Fan recognized some superficial similarities, such as limited supply and their appeal as alternatives to fiat currencies.
However, he argued that the two assets are quite distinct.
“There have been some very striking examples of the difference between these asset classes. On the day that Russia invaded Ukraine – a major, safe event, certainly one that most people did not predict – the price of gold rose, as expected, because gold is a safe haven. It usually increases when there is market turmoil,” Fan said.
“[But] the price of bitcoin has fallen significantly. So if you want to say it’s digital gold, well, it’s certainly not a safe haven, it hasn’t worked that way.
Oil, another commodity often compared to gold, also has stark differences.
Fan pointed out that oil supply is more vulnerable to geopolitical shocks, given the concentration of its producing regions, while the global gold production base makes it less vulnerable to such disruptions.
“We have done some analysis on this. The correlation between them is very low and this makes sense if you think about it from a fundamental point of view, from a supply side for example,” Fan said.
“Oil is produced in certain regions of the world where conflict, blockade or some type of geopolitical turbulence could suspend or disrupt that supply, resulting in a very clear supply shock, as we have seen in recent years and historically. .
“Gold is mined on every continent except Antarctica, so supply is much less sensitive to a specific supply shock. Russia, for example, was sanctioned after the invasion of Ukraine and is actually the third or fourth largest gold producer – but that hasn’t really caused a major shock to the gold market.”
Additionally, although oil primarily serves economic functions and has limited countercyclical uses, gold retains its intrinsic value, with a significant portion of its supply coming from recycling.
The differences between these three assets highlight the importance of understanding their unique characteristics, Robin Tsui, APAC gold strategist at State Street Global Advisors, recently noted.
