If you haven’t seen it yet, the recently published World Gold Council Mid-Year Outlook for 2020 is worth reading. Very much in line with our own thinking here at Global Gold, the World Gold Council also sees many reasons to be optimistic about gold’s performance going forward.

Gold had a remarkable performance in the first half of 2020, increasing by 16.8% in US-dollar terms and significantly outperforming all other major asset classes (Chart 1). By the end of June, the LBMA Gold Price PM was trading close to US$1,770/oz, a level not seen since 2012, and gold prices were reaching record or near-record highs in all other major currencies.

Value of Currencies in Gold since 1900

Source: World Gold Council, Bloomberg, Harold Marcuse

Though equity markets around the world rebounded sharply from their Q1 lows, the high level of uncertainty surrounding the COVID-19 pandemic and the ultra-low interest rate environment supported strong flight-to-quality flows. Like money market and high-quality bond funds, gold benefited from investors’ need to reduce risk, with the recognition of gold as a hedge further underscored by the record inflows seen in gold-backed ETFs.

As far as economic expectations go, hopes for a faster, V-shaped recovery from COVID-19 are quickly being replaced by projections of a slower (U-shaped) scenario, or potential setbacks from additional waves of infections (W-shaped). Regardless of the recovery type, the pandemic will likely have a lasting effect on asset allocation. It will also continue to reinforce the role of gold as a strategic asset.

As the World Gold Council also highlights, investors now face an expanding list of challenges around asset management and portfolio construction. Among these are:

• Low interest rates, which may push investors to seek riskier assets at elevated valuation levels and, for US pension funds particularly, may increase the value of liabilities, possibly reducing their funding ratio.
• Continued financial market uncertainty ranging from geopolitical tensions, to expectations of diverging global economic growth, and an increase in asset volatility.

In this context, we believe that gold is not only a useful long-term strategic component for portfolios, but one that is increasingly relevant in the current environment.

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