The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products are integral parts of the alternative investment equation. In recent years, investors have been boosting allocations to alternatives and research suggests gold is a key driver of alternative investment returns.
“Our research suggests that gold can complement alternatives by providing returns, improving diversification, adding liquidity, and enhancing overall portfolio performance,” according to the World Gold Council (WGC).
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs this year.
Inflation could serve as a catalyst for the yellow metal and for gold-related ETFs. By some metrics, the Fed has under-estimated U.S. inflation, which could prove beneficial to gold because the yellow metal is historically a popular inflation fighter.
“In recent years, buy-and-hold investors such as pension funds, endowments, insurance companies, and sovereign wealth funds (SWFs) have gradually increased their investments in alternative assets to diversify their portfolios and boost returns. ‘Alternatives’ make up 23% of SWF portfolios and 24% of global pension funds, up from single digits in 2000,” according to the WGC.
Over the past 20 years, gold has outperformed alternative and traditional assets, such as developed market stocks, hedge funds, developed markets debt, global real estate investments and the broader commodities complex, according to WGC data.
Gold is also now competing with digital currencies, such as bitcoin, but the WGC reminds investors that gold is very different from cryptocurrencies since the physical precious metal is less volatile, has a more liquid market, trades in an established regulatory framework, has a well understood role in an investment portfolio and has little overlap with cryptocurrencies on many sources of demand and supply. The yellow metal is also an important portfolio diversifier when traditional assets slump.
“Gold has a strong history of resilience during periods of elevated systemic risk, having outperformed equities as well as alternatives when markets have undergone a major correction,” said the WGC.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.