As institutions and pensions consider the prospects for gold, global head of research emphasizes the asset's drivers beyond investment
In its run over the past few years, the price of gold has broken out of several historic ranges and entered into unprecedented historic highs. It has bucked textbook expectations by growing while risk assets have performed, and has become one of the most popular safe-haven assets for global investors. In an era of considerable geopolitical uncertainty and following a considerable run in certain asset classes including gold, many pension plans and institutions may be considering how the yellow metal can perform for them going forward. Despite historic highs, one gold advocate believes the asset can continue to perform, due in part to its non-investment drivers.
Juan Carlos Artigas is global head of research at the World Gold Council. He outlined the way many investors typically assess gold, looking at four key drivers: economic expansion, risk & uncertainty, opportunity cost, and momentum. He believes, though, that a hyper fixation on gold’s investment utility can create blinders. More than 40 per cent of annual gold demand comes not from investment drivers but from jewellery and technology markets. Those markets will respond differently to changes in the four drivers than investment markets might.
“When people look at gold and when they see what is happening with gold, they are usually thinking through the lens of investment demand and the contribution to investors,” Artigas says. “That is, of course, important, especially if you look at short term performance… But gold is going to, in the end, respond to a combination of demand from investment, demand from consumption, and demand from central banks.”
The current run in gold, Artigas explains, is the result of a succession of different factors. Earlier in the year gold’s performance was largely driven by Asian investment and central bank demand. Central banks have been pushing to ‘de-dollarize’ for a while and gold has been a key instrument in that process. Asian investors have also seen more volatility in the past few years, prompting a push towards gold.
More recently, however, Western investors have gotten into the mix which Artigas has seen in positive ETF flows as well as an uptick in over the counter gold purchases. Still, he says, Western investment activity has remained somewhat muted. He argues that the gold market is not yet ‘oversaturated’ with investors despite the high price of gold. As the traditional investment drivers for gold such as geopolitical uncertainty ramp up, Artigas believes there may yet be room for the asset to move up.
While Artigas cannot forecast the price of gold directly, he notes that the World Gold Council has modelled the yellow metal’s behaviour in different economic environments. He notes that a slowing US economy with a falling rate cycle may push and pull on gold prices. Lower rates lowers the opportunity cost for owning gold and typically drives investment. At the same time, a slowing economy means that economic expansion driver is not as present in the price.
High gold prices may serve to be somewhat self-limiting, too. Artigas notes that while he does not see widespread appetite for selling among central banks, the high current prices may see them pause some of their gold purchasing. He argues, though, that over time consumers and investors adjust to a higher resting price and begin purchasing gold once again. While there may be short-term swings in the price of gold driven by a host of factors, Artigas emphasizes his believe in a long-term upward trajectory.
Given those drivers and that outlook, Artigas sees gold playing three major roles in Canadian pension portfolios. The first is as a long-term returns driver, riding demand from the myriad sources outlined above. The second is as a diversifier and the third is as a source of liquidity.
The diversification benefits of gold are often touted, along with other asset classes promising non-correlated returns. Artigas argues, however, that many of those non-correlated assets actually show correlation at the exact moment investors don’t want them to. Note the correlated drops in stocks and bonds during 2022. Gold, he says, offers positive market correlation when stocks are up and negative market correlation when stocks fall.
The liquidity function of gold is one that Artigas believes holds particularly true for pension plans. Given their liabilities and their allocations to many illiquid assets such as infrastructure, he argues that the liquidity of gold frees pension plans up to hold more illiquid assets in other parts of their alternative allocations.
Admittedly a gold advocate, Artigas believes that as institutions and pension funds assess their gold allocations they could continue to find utility in gold despite its high current price.
“It's interesting to see what has happened with gold. It is also very important to understand that even though oftentimes it's normal to focus primarily on the direction of interest rates or the dollar, to understand gold that explains only one portion of it,” Artigas says. “The gold market is a combination of global participants, global consumers, global investors. That, in itself, makes it a very interesting asset that complements other assets in a portfolio in a very effective way.”
