On the recent webcast (available on demand for CE Credit), An In-Depth Look Into Gold’s Resurgence and its Sustainability, Juan Carlos Artigas, Director of Investment Research at the World Gold Council, pointed out that gold has been performing on par with U.S. equities and outpaced major bond indices.
“Drivers of gold in the short and medium term include the performance currencies, like the dollar, investor expectations of monetary policy, inflation, the overall level of uncertainty and, of course, momentum, or the positive feedback loop whereby raising prices result in stronger inflows and vice versa – often times through derivatives markets,” Artigas said.
Gold’s performance this year has not been a one-off event. Since the 1970s, gold has returned an average 10% per year, comparable to the S&P 500 average price performance. Over the past 10 to 20 years, gold has also held up, supported by important structural changes in the market, like the economic expansion of emerging markets, increased use of gold as part of foreign reserves by central banks and the rising popularity of gold-backed ETFs.
“The reason gold has delivered such strong returns is that over the long run, it’s not only driven by uncertainty level or flight to quality periods, but also by the positive effect that rising incomes have both on the jewellery and technology demand for gold, but also in the form of long-term savings,” Artigas said.
George Milling–Stanley, Head of Gold Strategy at State Street Global Advisors, currently attributes the favorable position gold is enjoying to the general environment of uncertainty around the world, both geopolitical and macroeconomic.
“Gold always tends to thrive in an atmosphere of uncertainty,” Milling–Stanley said.
Click here to watch the Gold Webcast On Demand
On a more fundamental basis, the worldwide trend of lower interest rates has also been supportive of gold as an alternative asset that has helped maintained purchasing power. While the Federal Reserve has voiced its determination for tightening its monetary policy, Milling–Stanley argued that the U.S. will remain in a low or negative real interest rate territory for the foreseeable future. Meanwhile, in the rest of the world, negative nominal rates will prevail. Consequently, a zero yielding gold may continue to trump negative yields.
Beyond the large macroeconomic trends and short-term safe haven bets, Alistair Hewitt, Director at the World Gold Council, pointed to sustained demand that has helped support gold prices. Specifically, he looked toward jewellery, bar and coin investment and industrial uses, with a robust 70% of global demand coming out of the emerging markets.
“I care about consumer demand for gold, in contrast to a lot of commentary around the internet,” Hewitt said. “Of course financial market factors are really important for the gold price, especially in the short term, but they are not the only drivers. The interplay between supply and consumer demand are also really important too.”
For instance, India and China have been key to the performance of gold over the past decade as they are the two largest contributors of emerging market consumer demand. Meanwhile, European and U.S. consumer demand has dipped over the past decade.
However, Hewitt pointed out that European investors have exhibited an uptick in investment demand, particularly for gold-backed ETFs as Europe has led gold-backed ETF flows this year.
“People who want to move quickly into and out of gold were taking advantage of the superior liquidity behind GLD to build up substantial positions very rapidly, and then unwind them just as quickly. Safe haven flows come and go, that is a simple fact of life,” Milling–Stanley said..
Investors who are interested in gaining exposure to the gold markets have a number of options available to them. For instance, the SPDR Gold Shares (NYSEArca: GLD) is the largest and most liquid gold-related ETF on the market.
Furthermore, those who are still interested in gold but are wary of the negative relationship with a stronger greenback may consider the SPDR Long Dollar Gold Trust (NYSEArca: GLDW), which debuted earlier this year. The new gold ETF may help investors gain exposure to gold bullion price movements to hedge against potential market volatility, without worrying about the negative effects of an appreciating U.S. dollar.
Financial advisors who are interested in learning more about gold can watch the webcast here on demand.