The relevance of gold for Australian Self-Managed Super Funds

Gold, in Australian dollars (AUD), delivered positive returns in 2022 and this has continued so far in 2023. It has attracted attention: not only have global central banks continued to buy gold, but Australia’s sovereign wealth fund has also added gold to its portfolio. 

Looking further into 2023, most assets may see headwinds as stagflationary pressures intensify; our analysis, based on historical data, shows: 

• gold has historically posted superior returns during stagflationary periods 
• gold can improve the risk-adjusted return of a portfolio comprising of asset classes traditionally held by Self-Managed Super funds (SMSF).

Gold continues to perform in 2023

Following a staggering 2022, gold in AUD has continued to outperform major assets this year (Chart 1). While most assets plunged last year amid high inflation and rising rates, gold delivered a 7% return.¹  So far in 2023, gold has been spurred on (+7%) by intensifying expectations that major central banks will end their monetary tightening cycle, as well as by fears of a potential recession ahead.²  As noted in our 2023 Mid-year Outlook, gold may remain well supported in H2 as yields could remain relatively stable and the dollar might weaken. And should global economic conditions deteriorate, gold may experience stronger safe-haven demand during the second half.
 

Gold’s strength has been attracting attention. Central banks remained committed buyers in Q1 2023, adding 228t to global reserves after a record level of annual buying in 2022 (1,078t). Even though their buying spree could slow, we expect global central banks to remain net gold purchasers in 2023. And as our 2023 Central Bank Survey shows, over the next 12 months, 24% of central banks expect their gold reserves to increase whilst 71% believe global gold reserves will rise.

In its most recent position paper, the Future Fund, Australia’s sovereign wealth fund, announced the addition of gold to its portfolio. Their paper indicates that challenges such as high inflation and the weakened defensive nature of foreign currencies may have prompted its decision to buy gold – risks that are also found within an SMSF (Table 1).

Table 1: The Future Fund’s summary of portfolio implications and its reactions

Source: The Future Fund, Position Paper – The death of traditional portfolio construction?, December 2022

Bumpy road ahead

Markets may be vulnerable to negative shocks for the remainder of the year – most notably stagflation (Chart 2). This is a key concern shared by the Future Fund, highlighting that we may face an environment where inflation remains elevated and growth slows over the coming years. This scenario could be amplified by factors such as geopolitical conflicts.

“In this kind of environment there is a real risk of simultaneous slow growth, high unemployment and rising prices…”

–  The Future Fund, Position Paper – The death of traditional portfolio construction?, December 2022

In Q1 2023, Australia’s quarterly consumer price index (CPI) rose to 7% y/y (Chart 2); well above the target range of 2 to 3% and topping economists’ consensus expectation of 6.9%. As the Reserve Bank of Australia (RBA) noted in its June meeting, when it surprised investors with another 25bps hike, upside risks to the inflation outlook has increased and it might be difficult to achieve a soft landing for the local economy.

In the meantime, the future growth projection for 2023 has been dialled down further, from 1.8% to 1.5% according to Bloomberg’s economic forecasts in January and June.

Cross-asset implications

Elevated inflation can, broadly speaking, create significant issues for investors. For instance, the correlation between bonds and equities – two asset classes that represent a large proportion of many SMSFs – tends to rise during high-inflationary periods. Gold, on the other hand, remains an effective diversifier as inflation rises (Chart 3). 
 

In fact, gold has long been considered a hedge against inflation, and historical data confirms this (Chart 4). Also, the annualised return of 7.6% in AUD over the past 20 years has outpaced CPI both in Australia and globally.³

Stagflationary pressures pose challenges for all investor portfolios. Stagflation can severely disrupt financial markets and hamper the performance of major assets. But historical data shows that gold, a safe-haven asset, has benefited investors with attractive returns during such periods (Chart 5).

Gold’s portfolio impact 

Our analysis shows that a portfolio comprising assets typically held by SMSFs (Chart 6) would have achieved higher risk-adjusted returns and lower drawdowns with an allocation to gold (Chart 7).
 

This year we anticipate elevated inflation and an economic slowdown, key ingredients of stagflation. This could severely disrupt financial markets and hurt investors’ portfolios. Examining past data we find that not only can gold remain an effective equity-risk diversifier when inflation is elevated, it also posts superior performance in a stagflationary environment. 

Gold is often viewed as a safe-haven asset, or even an investment portfolio insurance policy. But historic data shows that its performance during both stable and volatile conditions is highly competitive compared to other popular assets held by SMSFs. 

Table 2: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns

Comparison of an average hypothetical SMSF and an equivalent portfolio with 5% gold over the past 3, 5, 10 and 20 years based on AUD returns

*As of 31 December 2022. 
Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Footnotes

1. Based on LBMA Gold Price PM in AUD, data to 31 December 2022.

2. Based on LBMA Gold Price PM in AUD, data to 30 June 2023.

3. For more, see: Gold Price Returns | Gold Prices | World Gold Council