The use of gold in institutional portfolios

From the COVID pandemic to the Russia−Ukraine war, the global economy has sustained significant and varied shocks over the last few years. And as monetary tightening has recently gathered significant momentum amid exceptionally high inflation, investors are operating in uncharted territory.

To better understand how investors are navigating this complex landscape, we partnered with Coalition Greenwich. They interviewed over 400 key decision makers at global investment institutions on their portfolio allocations and views on markets and gold.¹

The survey ran during a period in which the world economy was adjusting to a new policy reality, having benefited from enormous fiscal and monetary stimulus throughout much of the previous 18 months. The responses in our survey reveal that:

• interest rates and liquidity concerns are key drivers of allocation decisions
• investors who own gold do so overwhelmingly for diversification and inflation-hedging purposes 
• the vast majority of gold allocations are strategic, typically held for more than three years.

Portfolio positioning amid global monetary tightening and slowing economic growth

Unsurprisingly and as in our previous 2020 survey, return objectives remain the primary factor driving portfolio allocations in both the long and short term (Chart 1 and Chart 2, p2). But the secondary drivers – and shifts in their relative importance since our previous survey – highlight the challenges of achieving this return objective in the current environment. 

The ebb and flow between high prevailing price levels, uncertainty surrounding policy responses, and the threat of a recession continue to keep investors on edge, with institutions citing liquidity concerns, portfolio rebalancing, and interest rate projections as equally important drivers of short-term portfolio allocation decisions. 

Chart 1: Return objectives remain top, but interest rate and liquidity concerns are now on an equal secondary footing with portfolio rebalancing

This is a notable change from the 2020 study, in which interest rate projections and liquidity concerns lagged notably behind portfolio rebalancing short-term drivers. There is a similar – if less pronounced – shift in the relative importance of these factors in shaping long-term allocation decisions.

Comparing long-term and short-term drivers reveals one notable difference: ESG goals are significantly more important in driving long-term allocation decisions compared to short-term decisions.
 

Drivers of institutional demand for gold

Against the broader drivers of portfolio allocation decisions, our survey narrowed in on the factors driving specific allocations to gold. And it transpires that they align closely with the drivers of broader shifts in asset allocation. 

Our interactions with institutional investors tell us that diversifying return drivers, dampening portfolio volatility, and inflation protection are among the main motivations for allocating outside of fixed income and equities (Chart 3). A Mercer poll similarly concludes that asset owners and managers are ‘revisiting their strategic asset allocations to consider the resilience of their portfolios against increasing inflationary pressures, volatility, and potential disruptions to economic growth’. T. Rowe Price Group agrees: their clients are increasingly seeking help in evaluating ‘various sources of diversification… [the scope of] which has broadened to include inflation risk’. 

Chart 3: Gold’s diversification and inflation-hedging properties are valued

Our survey results suggest that gold could play a role in this re-evaluation of asset allocation. When asked to name the primary role that gold plays in their portfolios, the vast majority of those who own gold ranked diversification and inflation-hedging above all other considerations.

Overview of gold allocations among institutional investors

One of the primary goals of our study was to see how investors are reacting to the circular risks surrounding inflation, interest rates and economic growth, and to discover whether – and how – these risks are affecting their views of gold. 

Ownership of gold among the investors queried remains relatively low, with only about 15% of institutions having specific gold positions in their portfolios. Allocations are most common among institutions in EMEA and APAC (18% of respondents in each region, Chart 4, p. 3) and among the larger institutions with more than US$10 billion in assets under management (18%).

But despite modest overall participation by institutional investors, the average allocation to gold is a relatively healthy 4%. Notably, one of the survey’s top line findings is that these institutional investment holdings seem to be ‘sticky’. Of the investors who allocate to gold, the vast majority plan either to maintain or increase their current allocation to gold over the next three years, with only a very small minority expecting to reduce their allocation. 

Chart 4: Gold allocations are more likely among institutions in EMEA and APAC

Moreover, more than half of investors who hold gold expect the minimum holding period of their gold allocation to be more than three years, highlighting gold’s significance in their long-term asset allocation strategy. The most favoured route for allocating is via gold ETFs, followed by gold mining securities (Chart 5). Relatively few gained their exposure to gold through either vaulted bullion or derivatives.

Our research also indicated that a gold allocation can straddle a number of classifications within a portfolio. Investors who own gold most commonly hold it within their commodities allocation and/or see it as its own individual asset class.

Chart 5: Gold ETFs are the primary vehicle for allocating to gold