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What Makes Gold a Strategic Asset?

23 February 2021

Gold benefits from diverse sources of demand: as an investment, a reserve asset, jewellery, and a technology component.  It is highly liquid, no one’s liability, carries no credit risk, and is scarce, historically preserving its value over time.

Investing in gold is an extremely efficient way of preserving purchasing power over time. If we go right back to 1933, before the Gold Reserve Act, one ounce of gold cost US$20.67. Today, gold is over US$1800 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.

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.

The Gold market is a huge, international traded market, with daily trading volumes averaging AUD238 Billion. This represents 75% of the daily trading of the US stock market. Gold is traded is 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 is always buyers and sellers willing to trade close the current Spot Price.

Gold is significantly less volatile in its price movements compare to major stock indices and other commodities. Hence Gold 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”, in fact Gold’s long term (15yr avg) return in AUD is 8.2%pa. Which compares favourably to Australian government bonds which currently pay 1.89% PA for 15yrs. 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. 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 21%, whereas the AUD Gold price has increased 53%.

The World Gold Council, the market development organisation for the gold industry, has recently published a white paper in the relevance of gold as a strategic asset in 2021.