How gold fits in your clients' portfolios – and how to talk to them about it

While this presents opportunities for advisers to make adjustments to clients’ portfolios accordingly, there is good reason to maintain investment in assets typically considered ‘safe havens’ like gold. 

Sometimes overlooked or misunderstood, gold is an asset that plays an important role in client portfolios amidst varying macroeconomic conditions.

Looking at the year so far, its recent price performance has remained resilient, even as the market outlook has shifted. 

According to the World Gold Council’s recent report on gold demand trends, total investment in the second quarter of 2023 was up 20 per cent year over year to 256 tonnes, pointing to a solid gold market globally.

This investment was driven primarily by bar and coin growth and over-the-counter (OTC) market strength.

So what does this all mean for investors?

Gold is an important asset under all economic conditions

Gold has unique characteristics that make it a desirable asset under all circumstances, both during times of uncertainty and as a crucial asset for a well-diversified portfolio.

Unlike equities, gold has historically performed well in periods of financial turmoil, meaning investors can use it for portfolio diversification and as a source of liquidity.

While most assets tend to increase their correlation to equities in periods of high market uncertainty and often fall in tandem, gold’s price has generally increased in these same periods. 

Since 1971, returns on gold have been similar to equities and have outperformed bonds.

In the past 20 years, gold outperformed most major asset classes. Additionally, gold’s global investment demand increased by an average of 15 per cent per year during these two decades. 

What gold demand trends mean for investors

Let us look at some 2023 data: in the second quarter of 2023, our data shows that central bank buying slowed but remained resolutely positive.

This, combined with healthy investment and resilient jewellery demand, created a supportive environment for gold prices.

Bar and coin investment increased 6 per cent year over year, driven by notable growth in a few key markets.

Jewellery consumption was up 3 per cent year over year to 476 tonnes, which is remarkable in the face of persistently high prices in most markets. 

We believe that the floor for gold is high through the end of 2023.

Regardless of the method your clients choose to invest, it is advantageous to explore gold’s benefits in a portfolio.

Steady demand from institutional investors and central banks, as well as high retail and consumer demand from China, provide strong price support for gold.

The potential to maintain year-to-date gains is likely in most scenarios. Should the economy enter a downturn, we may see investors turn to gold in even greater numbers.

Gold remains well supported following a record central bank demand of 387 tonnes in the first half of the year.

Our full year 2023 expectation for investment demand is unchanged as strong OTC demand makes up for softness in exchange-traded funds and, to a lesser extent, bar and coin investment. The positive central bank trend is set to continue and will be supportive of overall demand and price.  

What your clients need to know 

The perception of gold as a cumbersome, immobile asset does not reflect the realities of today’s gold market.

Gold flows freely, with more than $180bn ($147bn) traded on a daily basis – exceeding that of other major financial assets. This year alone, gold has outperformed almost all major assets. 

Looking at gold’s performance historically, it is an asset that should perform well through uncertainty, as it has done in five out of the past seven recessions.

For investors looking for a store of value and a portfolio diversifier, gold has a strong track record of delivering those qualities.

Gold provides returns and helps investors manage the risks that other financial assets bring, playing a key role in creating a more balanced and stable portfolio.

As it relates to price, which is an important consideration, investors should think about gold as a long-term strategic asset that will deliver returns while providing liquidity and diversification to a portfolio. 

Because of its liquidity, gold is useful in times of both expansion and recession.

And if investors have illiquid assets that prove difficult to sell, they can still use gold to meet their most immediate needs.

One easy way for clients to get started is through gold ETFs. Since they are easy to purchase, following the same process as buying equities in the market, investing in ETFs can make the idea of owning gold more attainable to clients.

Regardless of the method your clients choose to invest, it is advantageous to explore gold’s benefits in a portfolio.

The perception of gold as a cumbersome, immobile asset does not reflect the realities of today’s gold market.

Long-term returns, liquidity, and effective diversification all benefit overall portfolio performance. In combination, they suggest that the addition of gold can materially enhance a portfolio’s risk-adjusted returns. 

With characteristics that make it viable in both stable and uncertain geopolitical and macroeconomic environments, gold itself also plays a critical role in addressing societal needs and is highly regarded across cultures globally.

Widely understood as a source of financial security, gold also contributes to industries like healthcare and technology, fuelling innovation and offering practical application.

Considering its value and recent demand trends, especially against the macroeconomic backdrop of today, now is a great time to talk to your clients about how to strategically incorporate gold into their portfolio, and the various methods to do so.

Joseph Cavatoni is a market strategist - Americas at the World Gold Council