Gold and related ETFs have been getting a lot of attention lately as a resurgence of risk-off events help trigger greater safe-haven demand, especially as traders grow wary of a correction in an extended bull market environment.
“I think when the books close on 2017, investors are going to look back and this year will provide yet another definitive proof point of why people should hold gold as a strategic asset class,” Matt Mark, Head of Distribution Strategy for the World Gold Council, said at the recent Morningstar ETF Conference.
Many investors have noticed the benefits of incorporating gold exposure to a diversified portfolio, especially in periods of heightened volatility. However, gold has also been an attractive long-term asset.
“As we’ve discussed, gold tends to be thought of as a store of value or something I might use tactically, but investors day by day are coming to this realization that all those tactical proof points are leading up to a pretty impressive long-term strategic track record,” Mark said.
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.
Gold’s performance has been supported by the positive effect that rising incomes have both on the jewellery and technology demand for gold and also in the form of long-term savings.
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, the U.S. may still 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.
Furthermore, fundamental demand and supply remains supportive of the gold outlook, especially with growing demand from the rising middle class out of the emerging markets.
“I think, first of all, you know the gold market is very large, and it’s a function of supply and demand with supply being somewhat constrained and demand growing pretty consistently, and that’s one of the reasons why the price of gold goes up in the long run,” Adam Perlaky, Investment Research & Management at World Gold Council, said at the Morningstar conference. “So one of the things that people actually don’t realize… is that 70% of demand actually comes from emerging markets, within that about 50% of global demand comes from China and India.”
Related: Where’s Global Gold Demand Coming From?
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.
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