Golden resilience rules

Wei Li
Wei Li
iShares EMEA Head of Investment Strategy


  • Risk assets have made a significant comeback despite weak macro data and low visibility on the path of corporate earnings. In this environment, building portfolio resilience is key.
  • Strategic tailwinds off the back of record central bank easing are also sharpening focus on gold.
  • A higher allocation to gold and gold producers may be supported by favourable demand and supply dynamics.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Resilience remains key

The Covid-19 pandemic has driven market volatility to its highest levels since the 2008 financial crisis. While market sentiment has recently made a comeback, investors remain wary, confronted with a spate of weak economic data and a lack of clarity in earnings. As markets remain volatile and economic growth uncertain, we see gold in demand for the short term as a source of portfolio resilience. Over the longer term, the precious metal may benefit from strategic tailwinds from pressure on bond yields through large central bank quantitative easing programs and a lower-for-longer rate environment. For investors looking to diversify within equities, gold producers may also be well positioned to benefit.

In a climate of uncertainty, portfolio resilience is more important than ever: the ultimate shape and timeline of the post-pandemic economic recovery remains uncertain, the trajectory for company earnings is murky, and macro data shows signs of further deterioration. This leaves ample room for volatility and sharpens focus on building resilience through a higher allocation to gold. The short-term outlook for gold shines due to its role as a portfolio diversifier. Over a one-year period, gold has maintained a low correlation range to global equities, between -0.5 to 0.3. We believe the diversification benefits could increase the longer gold is held within portfolios: over a five-year period, gold’s correlation to global equities averages near zero.1

1Source: Bloomberg, as of 5 May 2020. Notes: Correlations are based on the 90-day correlations between the United States Dollar Spot Index and the MSCI ACWI Index.

Diversification and asset allocation may not fully protect you from market risk.

Gold demand trends, Q1 2019 and Q1 2020


The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results.

Source: World Gold Council and Metals Focus, as 30 April 2020.

Near-term supply and demand dynamics may also be supportive. The total gold supply fell 4% in Q1, as the global lockdown disrupted mining operations; this drop came after total gold supply shrank in 2019 for the first time since 2008.2 As lockdowns persist, so too will challenges to supply. However, it is worth noting that industries such as mining may be among the first to return to work as countries relax restrictions, potentially alleviating pressures.

While gold supply has fallen, investment demand for gold has spiked. Investors allocated $14.8B to gold ETPs in Q1 2020 –the largest quarter for inflows since records began in 2011. April was the largest single month on record for gold ETP inflows, with investors adding a further $9.2B, and 2019 was the tenth successive year of net positive purchases of gold by central banks. This demand has helped offset some of gold’s Q1 losses in the jewellery and technology sectors due to industry stoppages. We expect demand from investors and central banks to remain strong over 2020; combined with short-term supply pressures, this could make gold increasingly attractive.

As the chart below highlights, gold has historically been favoured by investors during risk-periods and times of economic expansion, whether to build resilience or as a response to monetary easing. A risk to our short-term outlook is a safe-haven bid for the US dollar, as we saw earlier in the year. The illiquidity in markets caused by volatility in late February and early March forced investors to sell liquid assets, such as gold, to cover margin calls. This led gold prices to drop despite the sharp fall in risk sentiment. Since March, steps by global central banks to address market liquidity issues have helped to alleviate these concerns. Investors may also consider navigating uncertainty by utilising options on gold ETCs, which may help to hedge against some short-term volatility.

2Source: World Gold Council, as of 30 April 2020. ETP flows data is sourced from BlackRock and Markit, as of 30 April 2020.

Gold and equity cumulative performance, December 2000 –December 2019


Return %
2015 2016 2017 2018 2019 YTD 2020
-0.87 7.51 22.40 -8.71 27.67 -14.45
Gold Price
-11.42 9.12 11.85 -1.15 18.43 15.00

Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged, and one cannot invest directly in an index.

Sources: BlackRock, Bloomberg as at 14 April 2020. Gold returns based on percentage change in price over period in question. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.

Strategic tailwinds

On the longer-term strategic horizon, we see structural tailwinds that could boost gold. The unprecedented response to the coronavirus shock by global central banks has led to trillions of dollars in asset purchases and further cuts to interest rates; meanwhile governments have followed suit with record fiscal easing globally. This has pushed bond yields to record lows, further reducing the opportunity cost of holding a non-yielding asset such as gold. In the past, gold has also had a strong negative correlation to rates, and little appetite for rate hikes means yields are likely to remain in a lower-for-longer environment.

Source: Blackrock, May 2020.

Accessing gold producers

Investors looking for diversification from an equity exposure may consider allocating to gold producers. Gold producers are highly correlated to gold, and typically offer a beta of 1.5x-2x the move in gold prices. Producers may also look attractive due to current valuations, which are low relevant to historical valuations. In recent years, the industry has focused on cost and debt reduction. 'All in sustaining costs' (AISC) for producers have remained stable while gold prices have increased.3 Combined with the potential for gold prices to benefit from a short-term resilience drive and strategic tailwinds, we believe this could open opportunities for better earnings and cashflow generation from gold producers.

3Source: World Gold Council, February 2020. AISC estimate based on Q4 2019.

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