What makes gold a strategic asset?
The WGC emphasizes that gold plays a key role as a strategic long-term investment and in a well-diversified portfolio. Investors have been able to benefit from the appreciation of gold over time by maintaining a long-term allocation and leveraging its safe-haven status during periods of economic uncertainty.Gold is a highly liquid asset that is not someone else's debt, carries no credit risk, is scarce, and has historically preserved its value over time. Many sources of demand, such as investors, gold reserves, gold jewelry, and technology components, benefit gold.
Due to these characteristics, gold can enhance a portfolio in three key ways, according to the report:
- Providing long-term returns
- Diversifying the investment portfolio
- Providing liquidity
Long-term source of return
Investors have long viewed gold as a useful asset during uncertain times. Historically, however, gold has produced positive returns over the long term in both good and bad economic periods. The diverse sources of demand for gold make it particularly resilient and allow it to generate solid returns in various market conditions.Gold is often used as an investment to protect and grow wealth over the long term, but on the other hand, it is also a consumer good through demand for jewelry and technology. During times of economic uncertainty, the price of gold rises due to counter-cyclical investment demand. During economic growth, pro-cyclical consumer demand supports its development. These factors together give gold the ability to provide stability in different economic environments.
Functional distributor
Effective portfolio diversifiers can sometimes be difficult to find. Many asset classes are increasingly correlating with each other as market uncertainty rises and volatility intensifies, partly due to investment decisions made against risk. As a result, many so-called diversifiers fail to protect portfolios when investors need them the most.According to the WGC, gold is different in that its negative correlation with stocks and other risk assets increases when these assets are sold off. In the most recent sharp stock market pullbacks from 2020 to 2022, gold's performance remained positive.
Broad and liquid markets
The gold markets are large, global, and highly liquid. The WGC estimates that the value of physical gold holdings by investors and central banks is approximately $5.1 billion, and an additional $1.0 billion is open through derivatives traded on exchanges or OTC markets. The gold markets are also more liquid than several major financial markets, such as the euro/yen and the Dow Jones Industrial Average, with trading volumes similar to those of U.S. Treasury bonds. Gold trading volumes averaged about $163 billion per day in 2023. During that time, the share of OTC cash contracts and derivative contracts was $99 billion, and gold futures were traded at $62 billion per day across various global exchanges. Physically-backed gold investment funds (gold ETFs) provide an additional source of liquidity, as global gold ETFs trade on average at a value of $2 billion per day. Due to the breadth and depth of the markets, they accommodate large institutional investors who buy and hold. Unlike many financial markets, gold liquidity does not diminish even in times of stress in the financial markets. With gold, investors can manage their debts when it is difficult to sell less liquid assets in their portfolios or when they are mispriced.Risk-return ratio
Since any investment involves a balance between risk and return, it is important to identify and understand not only the opportunities but also the key risks, says the WGC.- Atypical valuation: Gold does not directly correspond to the most common valuation methods for stocks or bonds. Without a coupon or dividend, typical models based on discounted cash flows, expected returns, or book value cannot provide an appropriate estimate of gold's intrinsic value.
- No cash flows: Gold is generally considered to have the drawback of not producing regular income, unlike other asset classes such as bonds, real estate, or even some corporate stocks. The reason for this is simple: gold carries no credit risk. There is no promise of repayment. It also has no counterparty risk. However, this means that investors are reliant on price appreciation to benefit from gold. In this respect, gold has a strong track record. It has delivered positive returns over the long term in both good and bad economic times. At the same time, gold has outperformed many other major asset classes over various investment horizons (3 years, 5 years, 10 years, 20 years, and 50 years).
- Price volatility: Gold is an excellent portfolio diversifier because it behaves so differently from stocks and bonds, not because its volatility is low. Although gold is a less volatile asset than some stock indices, other commodities, or alternative options, the metal has produced nearly 30 percent profit in some years (2010) and nearly 30 percent loss in other years (2013). Overall, however, gold's correlation profile with stocks is asymmetric; in other words, it performs much better when stocks are falling than worse when stocks are rising.
