More and more Asian investors are making gold a core asset in their long-term investment portfolios. However, according to a survey by SSGA and WGC, 24% of asset owners in the Asia-Pacific region do not hold any gold positions.
Obstacles commonly cited include gold not paying interest or dividends (59%), difficulty in calculating intrinsic value due to a lack of mature models (37%), and reduced attractiveness due to the strengthening of the US dollar (25%).
(Source: Finews)
Nevertheless, the majority of respondents still hold gold, with 22% holding 0.1-0.9% of gold, 46% holding 1-4.9% of gold, and 8% holding 5% or more of gold. 27% of respondents also expect to increase their investment in precious metals.
Nevertheless, the majority of respondents still hold gold, with 22% holding 0.1-0.9% of gold, 46% holding 1-4.9% of gold, and 8% holding 5% or more of gold. 27% of respondents also expect to increase their investment in precious metals.
Listed main benefits include validated diversification, particularly during financial turmoil and economic uncertainty (59%), improved risk-adjusted returns (37%), and hedge against US dollar depreciation (37%).
This survey is based on interviews with 850 consultants, financial advisers, retail and institutional investors worldwide, including 63 asset owners in the Asia-Pacific region. Chief investment officers and investment directors account for 32% and 68%, respectively, each with more than US $1 billion of investable assets.
Nadege Dufosse, Cross Asset Strategy Advisor at Candriam, said the relationship between real interest rates and gold has been broken since early 2022. Historically, gold prices have been negatively correlated with changes in US real interest rates, a relationship that has worked well since at least 2006. Fundamentally, this is because, as a non-yielding physical asset, the cost of holding gold increases as real interest rates rise.
Since 2022, central banks around the world have doubled their demand for gold, from 11% of total gold demand in 2021 to 23% in 2023. This trend is continuing in the first quarter of this year. The significant increase in gold bars, coins and ETF investments in 2020 has since decreased significantly.
China is the world's largest gold producer, accounting for 10% of mining production, and the largest gold importer, accounting for 20% of demand. China's central bank (PBOC) has increased its gold reserves in 2022-2023, although the total amount is still uncertain as it does not need to transparently disclose its gold purchase volume. Similarly, Chinese consumers appear to have used some savings to buy gold, although the exact amount is unclear.
Overall, if central banks in all emerging countries increase their gold reserves by at least 10%, global gold demand will increase by more than 75%. This structural factor seems likely to persist. In the 2023 survey, 23% of central banks plan to increase their gold reserves in the next 12 months.
After the outbreak of the new crown pneumonia and the Russo-Ukrainian conflict, the impetus for central bank reserve diversification has been further enhanced. This may be because people believe that financial risks have increased, on the one hand, due to the increase in the US deficit, and on the other hand, due to the sanctions imposed by the United States on Russia, including freezing US $300 billion in reserves.
On the supply side, the trend is relatively stable, with annual output hovering around 3,000 tons, but the demand outlook seems quite good. We expect the macroeconomic environment to be slightly favorable. Real interest rates may be stable at most, or even slightly lower due to economic slowdown and preliminary interest rate cuts by the Federal Reserve, which should support gold prices. In addition, the risk of inflation reappearing in the opposite situation is also favorable for gold, as a physical asset that can prevent excessive inflation.
More structural factors will continue to drive the increase in central bank purchases, especially in emerging countries. Geopolitical risk still exists, and there is no sign of a decrease in the US deficit.
However, central bank demand for gold has always been quite unstable, and so has investment in ETFs. These two types of demand may accelerate, increase central bank gold reserves and attract financial investors to buy gold, which is the market's desired scenario, but their short-term development prospects are still limited. In the medium to long term, the upward trend in gold demand seems more evident.
When summarizing, Nadege mentioned: 'In a multi-asset investment portfolio, our simulations show that gold is attractive in terms of diversification because it is almost unrelated to the performance of stocks or fixed income. Gold has also responded positively to market tensions. A structural investment portfolio of 3-5% exposure to gold and other alternative assets can improve the risk/return situation of diversified funds.'