Investment Insights

Gold-backed exchange-traded funds and similar products (gold ETFs) have flourished since their introduction in 2003, attracting both institutional and retail investors across the globe. Recently, gold has become globally accepted as a strategic asset amidst a high-risk and low-rate environment spurring investment demand and the expansion of the gold-ETF market.

Gold has been on a generally positive trend for the past few years. However, the onset of the global COVID-19 pandemic has made gold’s relevance as a hedge even more apparent and accelerated its price performance. Gold increased by 17% during the first half of 2020, moving up by an additional 10% in July.  

Our new gold market outlook examines how the combination of high risk, low opportunity cost and positive price momentum looks set to support gold investment and offset weakness in consumption from an economic contraction.

The COVID pandemic and the ensuing economic lockdowns around the world have slashed global growth forecasts in 2020, but expectations of the speed of the economic recovery are quite varied. We analyse the potential performance of gold across four hypothetical scenarios provided by Oxford Economics.

The benefits of certain portfolio hedges came into clear focus during the 2008-2009 financial crisis and did so again during the subsequent European sovereign debt crisis, the 2018 December stock market pullback and the most recent COVID-19 pandemic.

We believe that the recent volatility in the gold price was driven by massive liquidations across all assets and likely magnified by leveraged positions and rule-based trading.

Risk appetite amid high uncertainty
As we look ahead, we expect that the interplay between market risk and economic growth will drive gold demand in 2020

Re-optimising portfolio structures for lower future expected bond returns suggests investors should consider an additional 1%-1.5% gold exposure in diversified portfolios.