In a negative yield world, is gold ready for a comeback?
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During the past decade’s bull market, gold has been largely off the radar for institutional investors. But as key bond yields turn negative, among other recessionary signals, chatter about the commodity is heating up.
“All precious metals have no correlation to the rest of the marketplace so that tends to be why gold and precious metals get looked at as a haven asset when markets get wonky,” says Stan Kiang, director of strategic accounts at Aberdeen Standard Investments Inc.
Most large corporate and public plans will have exposure to gold within their commodity holdings, which are usually between zero and 10 per cent of the portfolio, he says. However, if markets take a serious tumble, gold may look more attractive.
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“I would see pensions or institutional investors using the [exchange-traded funds] available in the marketplace because they’re a quick, cheap access to that tactical play that they want to make,” says Kiang. “And I think we’ve seen that this year with flows into ETFs. That generally tells you there’s some nervousness out there, just from what we’ve seen of flows into products like gold.”
The run-up in the precious metal over the past few months indicates a certain amount of fear in the markets, he adds. With those price increases, investors may think they’ve already missed the boat on making an allocation at an attractive level, but Kiang says there’s plenty of noise in the markets pushing more investors that way. Whether it be ongoing uncertainty about Brexit, central bank policies or trade tensions between the U.S. and China, a lot of factors are pointing towards gold still being in the early stages of a run.
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As far as where investors will cut, equity holdings will likely have to come down a peg, he says. “I think equities, obviously, have been more than a decade into this bull run. That’s where people are feeling most nervous. I think that’s probably where you’re going to see the allocation shift.”
As negative yielding fixed income is receiving major attention from markets, an asset like gold could be all the more attractive, says Greg Taylor, chief investment officer at Purpose Investments Inc.
“People have said they don’t really like gold because it costs you something to store it,” says Taylor. “You’ve got to get a vault, you have to rent that out and who wants to do that? But when you’re looking [at] a negative yielding world, and you’ve got US$16 trillion in bonds that are negative yielding, that’s costing you money to store that. And in that world, gold actually looks pretty attractive.
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“It’s a good offset to central banks that look to be offering another quantitative easing or another stimulus program. For investors that want to have something that isn’t manipulated by the central banks, gold could be showing up again.”