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ABC Bullion

Gold as a strategic asset

08 June 2022

In today’s global environment with lots of uncertainty and change, no one should be without gold.

Gold has been the epicentre of the monetary system for the last 3000 years and only in the last 40 years has the world replaced it with fiat currency.
Despite this Gold continues to remain an important part of the monetary system and valuable source of wealth for investors.

So why should you consider Gold?

Gold preserves your purchasing power

You don’t have to go back very far to see how an extremely efficient way of preserving purchasing power over time is investing in gold. In 1933, before the Gold Reserve Act, one ounce of gold cost US$20.67. Today, gold is over US$1855 an ounce. If an investor had put their capital into gold over that near 90-year period, their purchasing power would have been fully preserved.

Today, however, there is the potential both to preserve wealth and deliver outperformance by investing in gold.
Of course, putting money into physical bullion should always be a multi-decade commitment to wealth protection. Buying gold isn’t about making a quick buck. It’s taking steps to ensure long-term wealth protection…no matter what happens to the value of fiat currencies.

In recent decades, gold has been regarded as a peripheral asset within the institutional investment community. But we believe that markets are embarking on a period of change, which could provoke a fundamental shift in asset allocation. This reattribution of value is exciting for investors, and it is an opportunity to generate significant returns.
Gold’s traditional role as a safe-haven asset means it typically performs well during times of high risk. But gold’s dual appeal as an investment and a high-tier consumer good means it can generate positive returns in good times too.

Having just 10% of a portfolio allocation can make a tangible improvement to performance and protect against risk on a sustainable long-term basis.

Gold is a highly liquid market

The Gold market is a huge, internationally traded market, with daily trading volumes averaging US130 Billion. Gold is traded 23hrs a day, 5 days a week and 24x7 on some OTC platforms such as ABC Bullion’s online accounts.

This volume of trading ensures both the largest institutional and retail investors can access a highly liquid market with very small trading margins between and buying and selling. Unlike an individual share there are always buyers and sellers willing to trade close the current Spot Price.
Gold is significantly less volatile in its price movements compared to major stock indices and other commodities. Holding gold in your portfolio can act as a hedge against your more volatile assets.

Even though Gold’s volatility is low, that doesn’t mean its long-term returns are below other “low risk assets”, if we look at the 15-year period from 2005 to 2020, the price of gold increased by 330%. Over the same period, the Dow Jones Industrial Average increased by only 153%.

Also, studies show even having a minimal 10% allocation to Gold can increase a portfolio’s risk-adjusted returns by 1.25 times. 

Whilst most Gold commentary is US centric, and purely discusses the price action of Gold in USD, outside of the US Gold’s price needs to be considered in relation to the local currency.

Gold protects against inflation

In Australia we have had a wild ride in the USD:AUD exchange rate over the last 10 years, with the exchange rate trading from a high 1.10 to a low of 0.57. With Gold traded on exchanges in USD Australian gold holders are protected from falls in the AUD:USD exchange rate, but with the benefit of consistent returns compared to holding USD in a bank account.

Inflation erodes purchasing power over time, typically dollars held in a bank decline in purchasing power even when interest payments are considered. Over the past 10 years the purchasing power of the AUD has declined 20%, whereas the AUD Gold price has increased over 50%.

For further reading, The World Gold Council, the market development organisation for the gold industry, has recently published a very compelling white paper: ‘The relevance of gold as a strategic asset 2022’.
Warm regards,