Driven by a confluence of factors, including increased interest from central banks and investors with a preference for diversification, gold has built a reputation as a strategic asset in portfolios, according to gold strategist Robin Tsui APAC at State Street Global Advisors.
The product has seen a considerable rebound over the past eight months, hitting a new all-time high of US$2,531 in August.
According to the World Gold Council, gold has generated double-digit returns of more than 20% year to date, outperforming most other asset classes.
This target range, he explained, was revised in June following strong retail buying in Asian markets and strong central bank interest in the first half of 2024.
“We believe there has been a structural change in the gold industry, led by central banks,” he said.
“If you look at the first half of 2024, central banks have consumed almost 22% of the annual demand for gold. If we look back, let’s say 10 years ago, they were consuming about 10 percent.”
He continued: “So imagine, all these central banks are already consuming a large amount of gold from the supply, and we don’t think that this demand is going to stop. »
The strategist pointed to recent data from the World Gold Council, which found that market volatility and geopolitical uncertainty have propelled gold to a new level of popularity, particularly with central banks.
In June, a survey of 70 central banks around the world found that almost a quarter of them planned to increase their own gold reserves over the course of the year, the highest level seen since the start of the investigation in 2018.
This follows central banks adding 1,037 tonnes of gold in 2023 and a record 1,082 tonnes in 2022.
“We’re getting a lot more inquiries about gold from central banks, which is entirely consistent with the survey done by the World Gold Council, and that’s why I think it’s represents a fundamentally structural change.”
This is a very different use case than thirty years ago, when it was primarily associated with jewelry, he noted.
“[Back then] the jewelry sector actually consumed about 90 percent, but today the sector only consumes about 40 percent. Much of this is for investments and central banks,” he said.
Fight against underinvestment
Tsui explained that State Street generally advises investors to hold certain strategic allocations to gold, around 2 to 5 percent in a portfolio, as a protective hedge.
However, “many investors are still underinvested,” he said.
“Most advisors in Australia feel they need to advise their clients to allocate more,” he said.
“Australian investors understand what gold is – Australia is a huge market for commodities – but there is more and more discussion about how gold can actually help improve their returns. ”
Tsui says this underinvestment has fueled efforts to raise awareness of the role gold plays in portfolios and led to an increase in the launch of gold funds into the Australian market.
“Globally, from what we’ve seen, the average allocation is only 2 percent, so if all customers increased to 3 to 5 percent, or even 6 percent, that would be a structural change,” he said. .
As investors seek to diversify their portfolios and protect against market volatility, gold’s low correlation with traditional asset classes like stocks and bonds can help mitigate portfolio risk, a- he declared, and its historic role as a safe haven in times of economic uncertainty has been further strengthened. its attraction.
Amid escalating tensions in the Middle East, Tsui confirmed the company was “certainly” asking questions about the role gold plays in relation to other commodities like oil, silver and even bitcoin.
“I think fundamentally, clients are becoming more educated about the difference between oil and gold because the driving factors are very different,” he said.
“We have found that oil is historically a better hedge against inflation. I think that’s why we advise our clients to have both. You have a strategic allocation to gold as a hedge against market risk, but then you have some sort of allocation to oil and other commodities to provide that hedge against inflation.
