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Gold: investors’ key questions answered

With the precious metal increasingly included in multi-asset strategies, Robin Tsui of SSGA looks at key questions for investors.
Gold: investors’ key questions answered

Traditionally, investors have used gold tactically with an aim to help preserve wealth during market corrections, times of geopolitical stress or persistent dollar weakness. However, the expanding universe of investable asset classes and the relative ease of shifting across different assets mean today’s typical multi-asset fund looks different than “balanced” stock-and-bond funds of the past.

Gold, a unique asset class that has historically low or negative correlation with most other asset classes, is one of those assets that is finding its way into many multi-asset strategies.

We have gathered some most frequently asked questions by investors about investing in gold, with Robin Tsui, ETF Gold Specialist at State Street Global Advisors, providing his insights.

Q: What is the near term outlook for gold?

A: Gold is trading below the US$1,900/oz peak level reached in September 2011, so gold price is not anywhere close to its prior peak. We may potentially see more upside potential than downside risk for gold due to the ongoing geopolitical uncertainty, stretched valuations in equity markets and the current low real interest rate environment. Since the start of 2016, as a result of heightened geopolitical risks, increase in stock market valuations, rising number of shocked events such as the Brexit and Trump’s presidential victory, gold is increasingly becoming an important strategic allocation in an investor portfolio to hedge against unexpected risk. Since 2016, we have seen strong inflows into SPDR Gold Shares (GLD) and other physically-backed gold ETFs.

Gold has traded within a range between US$1,150 and US$1,350 an ounce since the third quarter of 2013. There have been occasional moves outside these parameters, but they have not been sustained. Today's price is a little above the midpoint of this trading range, and the possibility of another test of the overhead resistance in the area around US$1,350 may represent a potential tactical opportunity.

Source: Bloomberg Finance L.P., State Street Global Advisors, June 30, 2013 – September 30, 2017. Past performance is not a guarantee of future results.

Q: Where will gold go with the US rate hikes?

There may be short-term noise, but interest rate hikes are not necessarily negative for gold. The ten interest rate tightening cycles we analyzed since 1971, when gold effectively became free-floating, had resulted in an average increase of 37% in the price of gold1. In line with prior tightening cycles, gold is currently up 21% (as of 30 September 2017) from the price level we saw in December 2015 when the current interest rate tightening cycle just began2.

It is important to note that historically, it is the real interest rate, rather than nominal rate, that appears to have been the more predominant driver of gold3. We expect global real interest rates to remain fairly low in the near term and we expect this would continue to benefit gold as an non-yielding asset because a low real interest rate environment would potentially lower the opportunity cost of holding gold, making gold a more attractive investment.

We expect the Fed to adopt a gradual path of interest rate rises in the near term and any upside surprises to inflation (a key indicator for the Fed when deciding to raise rates) should keep real interest rates low relative to historical levels.

Q: Will a stronger dollar weaken gold?

The dollar and gold historically have often moved in opposite directions, but not symmetrically, in part because there are other factors that may drive the gold price. Analyzing the period between January 1972 and June 2016, the price of gold has historically risen about three times as much during periods when the dollar weakens as it has fallen when the dollar is strengthening4.

In periods of uncertainty, the dollar historically has often benefited from flight-to-quality flows. But so has gold. Investors have seen both the dollar and price of gold increase in recent periods of uncertainty, including during the 2008-2009 financial crisis, the 2010-2011 European sovereign debt crisis or, more recently, in the aftermath of the UK referendum to leave the European Union.

In contrast, weak-dollar periods have often historically coincided with other factors that may be supportive of gold. For example, falling interest rates, growth in emerging markets, or higher inflation expectations4.

We believe that gold is an effective portfolio diversifier, and that investors may wish to consider maintaining their gold allocations when the dollar is rising.

Click here to continue reading on Tsui’s view about the role of gold during periods of low inflation and whether gold is too volatile from a portfolio perspective.

1. Source: Bloomberg Finance L.P., State Street Global Advisors, April 1, 1971–September 30, 2017.

2. Source: Bloomberg Finance L.P., State Street Global Advisors, December 15, 2015 –September 30, 2017.

3. Source: State Street Global Advisors, “The Role of Gold in Today’s Global Multi-Asset Portfolio”, October 2017.

4 Source: State Street Global Advisors, “Gold’s Relationship with the Dollar: Don’t Count Gold Out with a Strong Dollar”, June 2016.


All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.

Investing in commodities entail significant risk and is not appropriate for all investors.

The views expressed in this material are the views of Robin Tsui through the period ended 16 January 2018 and are subject to change based on market and other conditions. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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