Gold has been in the headlines over the last couple of weeks, as the price of gold has recently surpassed the much anticipated $2,000 per ounce mark. The gold spot price is up approximately 26% in USD for the year as at 30 June 2020 compared to the Australian equities market (S&P/ASX 200), which is down just over 7% for the same period. So, why has gold appreciated? Gold has historically been viewed as a safe haven asset in times of uncertainty, it is viewed as a store of value offering protection against inflation and has also offered diversification benefits from traditional asset classes such as equities.
Over the past 12 months we have seen uncertainty dominate markets. In 2019 geopolitical tensions particularly between the US and China on trade contributed significantly to market volatility and overall nervousness in market. Roll forward to 2020 and we have been hit by a global health pandemic, geopolitical tensions have increased between the US and China and to add to this we have witnessed increased civil unrest in the US and we have a highly politicised US presidential election coming up. The elevation of macro-economic and geopolitical risks has increased ‘flight to quality’ episodes at the same time monetary policy is becoming less potent and low to negative rates reduce the opportunity cost of holding gold. Furthermore, the debasement of the USD has increased the preference of gold as a ‘safe haven’ asset relative to the USD.
From a portfolio perspective Lonsec views gold as an alternative asset. The low correlation to traditional assets enhances portfolio diversification, particularly in times of uncertainly. Given the increased uncertainly in the macro economic and geopolitical environment Lonsec added gold to the Lonsec Multi-Asset Portfolio on 17 March via the GOLD (ticker code) ETF which provides exposure to physical gold. We have subsequently also incorporated GOLD in our Listed Diversified Portfolios in both instances sitting within an alternatives allocation. The exposure has performed as expected, helping smooth portfolio returns in periods of market stress. Outside of providing diversification gold can also assist in hedging inflation risk. While we do not foresee inflation as a near term risk inflation pressures may emerge down the track particularly if we see global supply chains reconfigure and manufacturing industries come back onshore which would see a likely jump in inflation.
It is however important not to view gold as some kind of investment panacea. In non-stressed market environments gold will likely lag risk assets. Returns in USD have been around the 3 to 4% mark in stable market environments. Furthermore, gold can be volatile and 20% drawdowns are not uncommon therefore portfolio position sizing is important.
Whilst the gold price hitting the $2,000 milestone is significant, what’s more important is that if we are heading into a period of increased bouts of volatility, having exposure to assets that can perform in such environments should assist in dampening the adverse impacts on portfolios.
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