Last month, the World Gold Council (WGC) released a report entitled “Gold: valuable reserve amid unprecedented policy environment.” What are the main conclusions drawn in the report?
Let’s dive in:
The main thesis of the report is that gold is an excellent reserve asset, as it outperforms other assets in three important aspects: safety, liquidity and return. The authors point out that the pool of investable assets has shrunk recently due to quantitative easing policies and negative interest rates. Therefore, managers should increase their allocation to gold, which is a high-quality, liquid asset.
We totally agree that gold is a great portfolio diversifier, since it has historically had a very low correlation with other financial assets. Moreover, the gold market is very liquid, while the yellow metal is valuable collateral without credit risk. All these features make gold a safe-haven asset. So far, so good. However, the report argues that gold has consistently outperformed U.S. Treasuries, Eurobonds, Japanese governments bonds and UK gilts. The problem is that the authors choose 1997 as a start, which skews result towards gold, which have flourished in the 2000s, but suffered in the 1980s and 1990s.
Notably, investors should remember that gold shines only during crises. This is the very definition of a safe-haven asset, actually. In normal times, when things are going well, the yellow metal does not bear fruit (but it does not mean that traders cannot profit from trading gold in the short term). Surely, the sad feature of our world is that things are going well- until something goes wrong. This is why it is smart to allocate a portion of an investment portfolio to precious metals. However, investors should also remember that from the reserve management point of view, the aim of holding gold is not yielding huge gains each year, but to improve the long-term efficiency of the portfolio in terms of a higher reward-to-risk ratio.
Therefore, although gold is a valuable reserve, this does say anything about its technical situation. Nor does it imply that the price is likely to increase in the near future, especially now that investors believe that the U.S. central bank has begun to normalize its policy environment.