World Gold Council Makes Strong Case for GoldBy Alejandro Ehrenberg | Fri, 07/17/2020 - 16:37
The World Gold Council (WGC) has published its 2020 mid-year gold outlook, arguing that high risk, low opportunity cost and positive price momentum will support gold investment. “Investors have embraced gold in 2020 as a key portfolio hedging strategy; the pandemic will continue to reinforce the role of gold as a strategic asset,” the report states.
The WGC starts by underscoring gold’s strong performance in 1H20. “By the end of June, gold had reached record or near-record highs. Though equity markets around the world rebounded sharply from their 1Q20 lows, the high level of uncertainty surrounding the COVID-19 pandemic and the ultra-low interest rate environment supported strong flight-to-quality flows. Gold benefited from investors’ need to reduce risk,” the report explains. The WGC points out that it is likely that global economic recovery from COVID-19 will be W-shaped, keeping uncertainty levels high. “Against this backdrop, we believe that gold can be a valuable asset: it can help investors diversify risks and may positively contribute to improving risk-adjusted returns,” notes the WGC.
The report calls attention to massive rate cuts, mammoth stimuli programs and soaring government debt. These factors will heighten risk and lower expected returns. The WGC characterizes the ensuing situation as an upending in asset allocation. “Soaring equity market valuations are not always backed by fundamentals, increasing the chance of pullbacks; corporate bond prices are also increasing, pushing investors further down the credit-quality curve; short-term and high-quality bonds have limited – if any – upside, reducing their effectiveness as hedges,” the report says. As a result, gold’s appeal in investor’s portfolios becomes bigger.
The report concludes by explaining how gold investment will likely offset weak consumption. According to the WGC, gold’s behavior can be explained by the following four broad sets of drivers:
- Economic expansion: periods of growth are very supportive of jewelry, technology and long-term savings
- Risk and uncertainty: market downturns often boost investment demand for gold as a safe haven
- Opportunity cost: interest rates and relative currency strength influence investor attitudes towards gold
- Momentum: capital flows, positioning and price trends can ignite or dampen gold's performance
The current economic landscape presents three of these four drivers. Economic expansion is the one left out. “An economic contraction will likely result in lower demand for gold in the form of jewelry, technology or long-term savings,” the report states. Nevertheless, investment demand during periods of financial stress has historically offset weakness in consumer demand. “We believe that 2020 will be no exception; however, gold’s performance may depend on the speed and shape of the recovery,” the WGC concludes.