RISK MANAGEMENT | 23 NOVEMBER 2021

Why Gold Glitters
During Times Of Crisis

Absa-CIB-Author

Michael Mgwaba

Head: Exchange Traded Products

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During periods of market turbulence, gold offers investors a time-tested tool for achieving long-term strategic goals.

In times of economic uncertainty, many investors will seek out safe haven assets – investments that are expected to increase (or at least retain) value through market turbulence. Invariably, gold will come up in the conversation.

“Gold is known for being an effective investment tool in terms of risk management,” says Michael Mgwaba, Head of Exchange Traded Products at Absa CIB. “It is both pro-cyclical and counter-cyclical, which means its price performance often rallies during periods of uncertainty. But while many investors think you only need gold if you fear a crisis, there’s much more to it than that.”

Gold as an investment asset

“Gold is not a speculative asset, but rather an investment asset,” Mgwaba says. “It is a tool generally used by strategic investors who want to achieve medium to long-term investment goals.”

He points to the precious metal’s 30-year track record between 1987 and 2019 to underline his point. At key moments during that period – events like 1987’s Black Monday, 2008/09’s global financial crisis, Europe’s sovereign debt crises of 2010 and 2012 – gold delivered returns above 5%. In some cases, like the spread of negative rates in 2016, the returns exceeded 30%.

“Gold tends to have a low or negative correlation to traditional asset classes (like equities or bonds), especially during times of market turmoil,” says Mgwaba. “While most assets tend to lose value during systematic risk events , gold normally does the opposite. This was also evidenced during 2020, when the COVID-19 crisis caused financial market turmoil, yet gold remained a star performer. The current low-interest environment will continue to support investment in gold given that gold tends to perform well in a low-yield environment.”

Gold as an inflation hedge

There’s another reason for gold’s reappearance in the investment spotlight: its reputation as an effective hedge against inflation.

“A lot of money is being pumped into the world’s major economies, and there’s a fear that that this type of economic responses by government and central banks may lead to inflation in the long term,” says Mgwaba. “Inflation is a key concern for many large investors, particular pension funds which are also long-term investors. Their view is that the value of asset under management will be eroded by inflation and are looking for tools that are effective to hedge inflation and also to achieve long-term sustainability.”

Mgwaba highlights various pieces of research which indicate that during periods when inflation was above 3%, the returns on gold were above that. “In other words, gold helped investors to earn a return and protect themselves from inflation, a best storage of value” he says.

Like any investment, gold splits opinions. One school of thought insists that it should be in everyone’s portfolio, irrespective of market conditions; another dismisses it as being (in Warren Buffett’s words) “withing utility”. Mgwaba falls into the former camp. “The fact that central banks and large institutions have grown to become the biggest consumers of gold through direct acquisition or through gold exchange-traded funds (ETFs) tells us something,” he says. “We need to consider having gold in our portfolio as insurance and to improve our risk-reward profile.”

Or, as Mgwaba puts it: There’s no reason why you should not have gold in your portfolio.

Absa-CIB-Author
Michael Mgwaba

Head: Exchange Traded Products

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