Driven by a confluence of factors, including increased interest from central banks and investors with a preference for diversification, gold has built a name for itself as a strategic asset in portfolios, according to Robin Tsui, APAC gold strategist at State Street Global Advisors.
The commodity has witnessed a considerable rally over the last eight months, hitting a fresh record high of US$2,531 in August.
According to the World Gold Council, gold has generated double-digit returns of more than 20 per cent year-to-date, outperforming most other asset classes.
Speaking to InvestorDaily, Tsui observed gold is already trading in line with State Street’s bull case of US$2,500 to US$2,700.
This target range, he explained, was revised in June following strong retail buying from Asian markets and strong central bank interest in the first half of 2024.
“We do feel there’s been a structural change to the gold industry, led by the central banks,” he said.
“If you look at the first half of 2024, central banks consumed close to about 22 per cent of the annual gold demand. If we look back, let’s say 10 years ago, they were consuming about 10 per cent.”
He continued: “So imagine, all these central banks, they already consume so much gold out of the supply, and we don’t think this demand will stop.”
The strategist pointed to recent data from the World Gold Council, which found market volatility and geopolitical uncertainty have propelled gold to a new level of popularity, especially among central banks.
Surveying 70 of the world’s central banks in June, it revealed almost a quarter of central banks plan to add to their own gold reserves within the year, the highest level observed since the survey began in 2018.
This follows the addition of 1,037 tonnes of gold by the central banks in 2023 and a record 1,082 tonnes in 2022.
“We’re having more conversations with central banks in the APAC,” Tsui told InvestorDaily.
“We’ve been getting a lot more inquiries into gold from the central banks, that’s very consistent with the survey that the World Gold Council did, and that’s why I think it’s a fundamentally structural change.”
This represents a very different use case for gold compared to that from three decades ago when it was primarily associated with jewellery, he noted.
“[Back then] the jewellery sector actually consumed about 90 per cent, but now the sector only consumes about 40 per cent. A lot of it is going into investment and central banks,” he said.
Tackling underinvestment
Tsui explained State Street typically advises investors to hold some strategic allocations to gold, around 2–5 per cent in a portfolio, as a protectionary hedge.
However, “a lot of investors are still underinvested”, he said.
“Most of the advisers in Australia feel like they need to advise clients to allocate more,” he said.
“Australian investors, they do understand what gold is – Australia is a huge market for commodities – but there’s more discussion around how gold can actually help to improve their returns.”
According to Tsui, this underinvestment has fuelled efforts to improve awareness around the role gold plays in portfolios and has resulted in growing gold fund launches in the Australian market.
“Globally, on average, based on what we found, the average allocation is only 2 per cent in general, so if all clients increased to 3–5 per cent, even 6 per cent, that would be a structural change,” he said.
As investors seek to diversify their portfolios and protect against market volatility, gold’s low correlation with traditional asset classes like stocks and bonds can help to mitigate portfolio risk, he said, and its historical role as a safe haven during times of economic uncertainty has further enhanced its appeal.
Amid escalating tensions in the Middle East, Tsui confirmed the firm “certainly” gets questions regarding the role gold plays versus other commodities like oil, silver, and even bitcoin.
“I think fundamentally, clients are getting more educated about the difference between oil and gold, because the drivers are quite different,” he said.
“We found oil has historically been a better inflation hedge, I think that’s why we advise clients to have both. You have a strategic allocation to gold as a hedge against market risk, but then you have some sort of allocation to oil and other commodities to provide that inflation hedge.”
