Given its perceived status as a safe-haven asset, gold is never far from our thoughts when assessing the multi-asset opportunity set. But while we maintain a positive long-term bias on the metal for the role it can play in diversified portfolios, we need to stay price sensitive too.
This led us to close a tactical overweight in gold back in July, when the metal’s price was hitting record highs.
Since August, though, the gold price has come back down. At some of the levels witnessed in September, we took the opportunity to scale back into the metal.
With interest rates close to zero in most developed markets and increasingly limited space for monetary policy against an uncertain macro backdrop, finding candidates to diversify the cyclical nature of equities and other risky assets has rarely been more challenging.
Gold is, in our view, less exposed than many assets to innovative and unconventional future measures to ease policy even further. We therefore believe it offers something different from fixed-income assets in that regard.
We must nevertheless acknowledge that some of the dynamics around gold as an asset may be evolving.
Gold price movements have historically closely tracked a combination of real yields and the US dollar, but there is the possibility that this relationship could be changing.
In particular, with yields pinned close to zero it could be that inflation expectations and realised inflation become the more important future drivers of fair value. Given inflation expectations have tended to move up and down with equity markets, that would seem at odds with gold’s expected role as a safe haven and diversifier.
We also can’t ignore the performance of gold during some of the periods of market stress this year. The gold price fell in the midst of the crisis in March when, as Martin explained, “betas go to 1”. Even though gold did fare better than equities through that episode, this was obviously not ideal for a supposed safe haven, but can perhaps be understood in the context of an unprecedented panic.
Yet gold also weakened alongside equities in September. Does this validate concerns that gold may be becoming more correlated to inflation expectations, which were weighed down by a darkening economic outlook, and thus equities?
It is too short a period with too many moving parts to reach a definitive conclusion, but we must remain aware of this risk. Trading a defensive asset close to record price levels also requires a different approach, in our view.
So while we believe gold is still likely to play a valuable role in portfolios over the medium term, we don’t take any safe haven for granted.