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.
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.
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC.
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.
SPDR Gold Trust (the “Trust”) is currently listed on the Stock Exchange of Hong Kong Limited (“SEHK”) and Singapore Exchange Limited (“SGX”). No action has been taken to permit an offering of Shares of the Trust other than those listed above. The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the Trust’s fees and expenses. The Trust’s prospectus is available and may be obtained upon request from State Street Global Advisors Asia Limited and State Street Global Advisors Singapore Limited (Co. Reg. No: 200002719D, regulated by the Monetary Authority of Singapore) or can be downloaded from www.spdrgoldshares.com. Investors should read the prospectus of the Trust before deciding whether to purchase Shares. Shares in the Trust are not obligations of, deposits in, or guaranteed by, World Gold Trust Services, LLC, State Street Global Advisors or any of their affiliates. You may wish to seek advice from a financial advisor before making a commitment to purchase Shares. In the event that you choose not to seek advice from a financial advisor, you should consider whether the Trust is suitable for you. Investors have no right to request the sponsor to redeem their Shares while the Shares are listed. It is intended the holders of the Shares may only deal in their shares through trading on the SEHK and the SGX. Listing of Shares on the SEHK and the SGX do not guarantee a liquid market for the Shares, and the Trust may be delisted from the SEHK and the SGX. Nothing contained herein constitutes investment advice and should not be relied upon as such. Shares may fall or rise. Past performance is not indicative of future performance.
The Trust has filed a registration statement (including a prospectus) with the Securities and Exchange Commission (“SEC”) for the offerings to which this communication relates. Before you invest, you should read the prospectus in the registration statement and other documents GLD has filed with the SEC for more complete information about GLD and this offering. Please see the GLD prospectus for a detailed discussion of the risks of investing in GLD shares. When distributed electronically, the GLD prospectus is available by clicking here. You may get these documents for free by visiting EDGAR on the SEC website at sec.gov or by visiting spdrgoldshares.com. Alternatively, the Trust or any authorized participant will arrange to send you the prospectus if you request it by calling +852 2103 0288 (Hong Kong) or +65 6826 7555 (Singapore).
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its content disclosed to third parties without SSGA’s consent.
SPDR® is a registered trademark of Standard & Poor’s Financial Services LLC (S&P) and has been licensed for use by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by S&P, S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone: +852 2103-0288. Facsimile: +852 2103-0200. Web: www.SSGA.com
State Street Global Advisors Singapore Limited, 168 Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore). Telephone: +65 6826-7555. Facsimile: +65 6826-7501. Web: www.SSGA.com
© 2018 State Street Corporation. All Rights Reserved. 2008415.1.1.APAC.INST Exp. Date: 01/31/2019