Gold – the Asset Class for the Moment
Gold stands out as a crucial asset class for safeguarding wealth in the face of inflation and geopolitical uncertainty, offering unique benefits that other assets struggle to match. Inflation poses a significant challenge to traditional investments like bonds and equities, often leading to a stronger correlation between their negative returns during inflationary periods.
Amidst the ongoing global economic landscape, characterized by rising inflation and geopolitical tensions, the value of gold in portfolio diversification cannot be overstated. The unprecedented surge in government spending post-COVID, coupled with persistently low interest rates, initially rescued the global economy from collapse but subsequently fueled inflation. This inflationary pressure, stemming from expansive fiscal and monetary policies, continues to linger, underscoring the importance of gold as a hedge.
Looking ahead, the outlook remains concerning, with ongoing government spending in key economies like the United States and China likely to sustain economic growth but also inflationary risks. Geopolitical tensions further exacerbate the situation, particularly evident in the energy sector with ongoing sanctions against Russia driving oil prices higher.
The disruptions in global supply chains, exposed by the pandemic and compounded by geopolitical events such as the conflict in Ukraine, have intensified inflationary pressures. These disruptions highlight the need for assets that can withstand such shocks, with gold emerging as a reliable option.
Despite the allure of the US dollar historically during times of geopolitical turmoil, gold has proven to be a superior asset class. Over the past five years, gold has significantly outperformed the dollar, offering investors a more reliable hedge against the uncertainties of geopolitical challenges (Chart 1). Over the past five years consumer prices have risen over 20% in the US while the US$ is up barely 8% against a basket of currencies while the gold price is over 80%.
Gold’s ability to beat inflation is further reinforced by data from the World Gold Council that shows that gold has outperformed inflation over five centuries.
Chart 1: Gold outperforms inflation and the dollar over the past five years
Rebased to May 2019=100
Source: Bloomberg
Other perennial factors weigh in favour of the yellow metal. Central banks, particularly in emerging markets, continue to accumulate gold to provide backing for their currencies. Over the past few years, China has steadily increased its gold reserves, a move widely seen as part of its strategy to diversify its foreign exchange reserves away from the US dollar. This accumulation signals China’s intent to bolster its economic power and hedge against currency risks, especially amid geopolitical uncertainties. The People’s Bank of China (PBOC) has bought gold in each of the last seventeen months. In the first three months of 2024, the PBOC bought 27 tonnes of gold.
Gold is a very liquid market, with $100 billion of gold traded daily. The total value of tradable gold is estimated by the World Gold Council to be around $5 trillion, a market that is so large it can absorb any reasonable amount of trading daily. It is also one of the few asset markets where trading prices are published 24/7.
In conclusion, gold’s enduring value in portfolio diversification cannot be overlooked. As a hedge against inflation and geopolitical risks, it has demonstrated its resilience and ability to outperform traditional assets, making it a compelling addition to any well-rounded investment strategy.
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