Gold investment seen critical in managing
emerging market portfolio performance – WGC
May 10 2018
Gold is a proven store of value,
especially for its role in safe-haven investment in times of geopolitical
crises, but according to new analysis from the World Gold Council (WGC), the
yellow metal plays a critical role in portfolios with exposure to emerging
markets (EM).The WGC notes in its ‘Investment Update’ that economic growth is a
key driver of gold demand, especially in EM countries where there is a high
affinity for gold as jewellery and investment. At the same time, gold tends to
perform well in period of crisis.The WGC believes that gold’s safe-haven
investment and value preservation qualities are highlighted during extreme
systemic events. Its price has historically increased during financial crises,
including some linked to EM jurisdictions.The WGC argues that having a
strategic position in gold helps to improve EM portfolio performance as it can
be used to capture EM upside through gold’s link to rising incomes; protect
against systemic risks, which reduce portfolio volatility and losses –
producing gains in some systemic sell-offs; and hedge foreign-exchange risk at
a lower cost than traditional currency hedges.
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The report notes that gold
investment has a dual role in portfolios. Because gold gives a US investor’s EM
portfolio positive correlation in a rising market and negative correlation in a
falling market, gold has a dual nature for investment purposes – this quality
is not seen in other traditional hedges.Gold has performed well over time with
returns on pace with the S&P 500 over multiple time periods. “It is not
simply a hedge that eats into net returns, but it also provides the
diversification for investors during strong and weak market environments,” the
report found.The WGC says EM investments have a “tremendous amount” of potential
to continue growing and play a critical role in an investment portfolio. This
is supported by global economic growth, which tends to have an incremental
effect on performance in emerging versus developed countries.
Further, nearly two-thirds of
global gold demand comes from emerging markets. Over the long run, income
growth is a key driver of gold demand, especially in EM countries such as
India, where there is an affinity for gold. Having gold exposure in an EM
portfolio therefore couples with the EM exposure itself, the report points out.“Adding
gold to an EM portfolio produces higher absolute and risk-adjusted returns than
a fully hedged or unhedged EM portfolio,” WGC analyst and report co-author Adam
Perlaky said in the commentary.Choosing whether to hedge the foreign currency
or systemic risk of an EM portfolio is a critical decision for a US investor.
Regardless of the decision, having some gold exposure provides a clear
advantage for risk-adjusted returns compared with a portfolio with no gold exposure.
The WGC ascribes gold’s advantage
as an foreign exchange hedge being in part owing to the high cost of hedging EM
currency through traditional currency swaps, forwards, and futures, especially
in periods when interest rate differentials between developed and emerging
economies increase. For example, between 2002 and 2017, the average implied
cost to hedge an EM portfolio was 4.1%, whereas the average yearly performance
of gold over that period was 11.2%. And while interest rate differentials have
compressed, gold overlays remain highly cost effective, Perlaky stated.
ETF FLOWS
Meanwhile, the WGC on Wednesday
reported that global gold-backed exchange traded funds (ETFs) holdings added
72.2 t of gold to a total of 2 481 t in April, reflecting the strongest month
of net inflows in more than a year. Growth in global holdings was led by
significant North American and European inflows and supported by a small increase
in Asia, the council says.ETF inflows were steady throughout the month despite
the gold price retraced early gains, finishing April 1% down, after reaching an
intra-day high of about $1 360/oz mid-month.
The WGC notes that global stocks
were mostly higher during the month, but many indices remain down or flat for
the year. Market uncertainty stemming from missile strikes in Syria by the US,
the UK and France, as well as continued trade war rhetoric cast a cloud over
the markets. At the same time, higher inflation expectations and a weaker US
dollar through April offset the negative effect of higher interest rates on
gold.North American and European funds saw significant net inflows in April,
growing by 3.4%, or $1.9-billion, and 2.8% or $1.2-billion, respectively. Total
fund holdings in Asia rose by 3%, or $100-million, to 80.2 t. Funds in other
regions had a marginal loss of 1 t or 3% of assets.
Source: http://www.miningweekly.com/