Investors shying away from global volatility have found some refuge in gold.

The yellow metal may be some way off its historic peak in August 2011 when it neared $2,000 an ounce, but it has leapt 11.3% in less than two months from $1,280 on May 29 to broach $1,450 last week. And yesterday it was up 16.3% since this time last year, standing at $1,424.

Similarly, with the global economy overshadowed by trade tensions and uncertainties, the 10-year US Treasury yield has dropped to 2.05% from 2.74% as of July 23.

Given that bond yields will likely remain weak as the US Federal Reserve’s plan to cut rates solidifies, the appeal of gold could gain further as investors diversify towards defensive assets. Its value could of course also fall, dependent on the actions of the US central bank.

Central banks have been adding to their holdings this year, with the net gold purchased by these institutions reaching 145.5 tonnes in Q1 2019, up 68% year-on-year. 

Moreover, investors have poured some $7 billion into gold-backed ETFs since June, reversing $530 million of outflows registered in the first five months of 2019, said Robin Tsui, Asia-Pacific gold strategist for the SPDR ETF business of State Street Global Advisors. 

AsianInvestor asked six investment experts for their views on the metal as an investment, how asset owners are gaining exposure to it and where they see the price going. Most are favouring some allocation to gold, but with some caveats. 

The following extracts have been edited for brevity and clarity.

Prashant Bhayani, chief investment officer for Asia (based in Singapore)
BNP Paribas Wealth Management

Gold has attracted a lot of interest from investors lately, and we have been recommending the asset class for some time as well. Central banks around the world are getting increasingly dovish in recent weeks, with the US Federal Reserve signaling a possible rate cut at their next meeting in July. This could kick-start global synchronised interest rate cuts, and the resultant decline in real yields should help gold to compete with government bonds as a safe asset.

Prashant Bhayani

Real yields are expected to remain low in the US and negative in Europe and Japan. In recent months, the amount of negative-yielding bonds has grown to a record $13 trillion. Gold offers inflation protection that these instruments lack. In fact, the inverse relationship between bullion’s price and US real rate expectations is at the strongest it has ever been, with a correlation of -0.7 on a 60-day basis.

We are positive on gold, given its natural hedge against tail risks, be they related to inflation, financial instability or geopolitics. Uncertainty will no doubt drive safe-haven demand. Investors are worried about tensions between Iran, the US and Britain [amid the recent seizures of oil tankers], the ongoing trade war and Brexit.

Furthermore, emerging central banks are increasing their gold purchases to the highest level in five years. With our expectation of a weaker US dollar in the coming months due to slowing US economic growth and rate cuts, the current environment is bullish for gold. Therefore, we recently upgraded our expected trading range to $1,350 to $1,500 over the medium term as a portfolio hedge.

Apart from spot gold, investors can also get exposure to gold via exchange-traded funds, gold mining stocks, and gold-related structured solutions.

David Chao, Asia Pacific ex-Japan global market strategist (Hong Kong)
Invesco

Our latest global sovereign study showed that concerns about global instability, political risk and the US fiscal position have encouraged some institutions to move towards gold.

David Chao

Meanwhile, US debt-to-GDP levels are at levels not seen since World War II and continue to rise, leading to question marks for some over the assumed risk-free nature of US government paper and the status of the US dollar as the world’s reserve currency.

However, with other major reserve currencies facing similar – if not greater – concerns, gold has become an alternative for central banks seeking a ‘safe haven’ asset, also offering diversification away from the US dollar.

We also believe the rise in gold is tied to greater concerns about the breakdown in trade negotiations between the US and China. It makes sense for investors to always diversify their portfolio. In an environment of uneven global growth and interest rate cuts, investors should think about alternative stores of wealth, such as gold.  

Robert Jones, director (Hong Kong)
FCL Advisory 

‘The sage of Omaha’ Warren Buffett doesn’t invest in gold because he believes it holds no value.  However, from global central banks to Chinese and Indian consumers to family offices in Asia, investors continue to see gold as a store of value worthy of passing down the generations.  

In my case [as an adviser to family offices], I have clients who hold it, mostly in physical allocated form in vaults outside the banking system. Substantial family offices believe the only way to ensure access in the event of a crisis is to hold physical allocated gold in the major vault centres of Hong Kong, Singapore and Zurich.

Other forms of gold including gold held in vaults at major banks or in exchange-traded funds or paper form, unallocated physical gold, or even gold mining stocks. But [all these forms] mean that there is less chance that you’ll have access to the gold when you most need it.  

As central banks continue to flood the world with QE [quantitative easing], their gold purchases should send a strong signal to investors that monetary stimulus could cause significant inflation at some point, and that we should all follow the lead of central banks and have some gold in our portfolios as a hedge against inflation and/or another crisis of some kind.

Ultimately, the idea is that gold should do very well in a crisis or high/hyper-inflation environment, but that could mean that it maintains the same price while everything else drops in value. Predicting the price of gold is like predicting the way the wind will blow, but if you put a gun to my head, I’d say it will rise to $1,500 within 12 to 18 months.

Benn Ng, head of southeast Asia (Singapore)
Raffles Family Office 

Benn Ng - Managing Director and Head of SEA
Benn Ng

One of the greatest advantages of investment in gold is its negative correlation with the equity markets. Hence it helps to lower the volatility of a investment portfolio. On the other hand, there is a holding cost. Of late, gold has rallied on the back of central banks purchases as well as a lower US interest rate.

From an investor adviser point of view, we do have some clients who allocate to gold, and our suggested allocation is no more than 3% to 5%. As gold does not generate interest nor dividends, clients who are concerned about portfolio performance should understand that gold can be a drag on portfolio performance. 

In Warren Buffett’s words, gold is a goose that does not lay eggs. So we do not advise all of our clients to allocate to the yellow metal. We prefer to gain exposure through mining companies like BHP Billiton.
 
Pierre DeGagné, head of funds selection (Singapore)
DBS Private Bank
Pierre DeGagné, head of funds selection, DBS
Pierre DeGagné

Our chief investment office has been calling for the accumulation of gold positions in portfolios since January. We view gold as a strong diversifier, and a good and inexpensive way to potentially hedge tail risks in times of volatility.

We believe it’s wise to have some allocation to the original alternative asset, and have been advising clients to increase exposure to it this year. We’ve seen a significant increase in both transactions and appetite for gold products (such as physical, financial gold, gold derivatives and gold-linked structured notes).

In terms of funds on our high conviction list, we have been focusing on the Investec GSF Global Gold Fund, which invests primarily in gold equities and has performed phenomenally year to date. We have also added the Merian Gold and Silver Fund, which focuses more on silver and silver equities. These have lagged this year, and may provide an opportunity for clients to catch-up on the rally if the silver/gold ratio reverts to mean [and indeed silver has been rallying in recent few days].

Robin Tsui, Asia-Pacific gold strategist for the SPDR ETF business (Hong Kong)
State Street Global Advisors

Since the US Federal Reserve signalled an openness to cut interest rates for the first time in a decade, institutional investors have piled into gold, through exchange-traded funds (ETFs) and futures, to hedge against market uncertainty and potential dollar weakness.

Robin Tsui, gold strategist, APAC, SPDR Business, State Street
Robin Tsui

At the same time, central banks around the world are also stepping up their monetary easing, the opportunity cost of holding gold has fallen to a level that has become extremely appealing to investors around the world.

Investors have poured over $7 billion into gold-backed ETFs since June, reversing $530 million of outflows registered in the first five months of 2019. To put these figures into context, gold-backed ETFs posted $4 billion of inflows for the whole of 2018.

With $13 trillion of bonds are trading at negative yields, coupled with ongoing trade disputes and geopolitical tensions, as well as the continued shift toward easing monetary policy by central banks, we believe investor appetite for gold is set to continue in the coming months.