The gold price has hit a record high, in Australian dollar terms, and is worth more than A$2000 an ounce, after having a strong rise over the past year.
In local currency terms, the gold price is up more than 20 per cent over the past year. That growth has been fuelled by a combination of factors, including the sell-off in global share markets and the weakness of the Australian dollar.
Fund managers ETFS Securities, which offers a physical gold exchange traded fund on the Australian Securities Exchange, says gold has once again played its role as a safe haven in the face of equity market volatility.
“As an investment asset, gold is commonly deployed as a portfolio diversifier, inflation hedge and quasi-insurance policy,” says ETFS Securities in a recent report on the precious metal.
“It has shown persistently low levels of correlation with stocks and bonds over the long term, which means that the addition of gold to a portfolio is often able to improve risk-adjusted returns by adding diversification.”
Gold is often referred to as an event risk hedge, producing positive returns when unexpected events occur. It did this during the 1987 sharemarket crash, the 1990 Iraq war, the Russian debt crisis of the late 1990s, the bursting of the dotcom bubble in the early 2000s and the US equity bear market in 2008.
Part of gold’s appeal is that it is a highly liquid asset
A common argument made against gold is the opportunity cost of holding it. It produces no income, so investors who include it in their portfolios must forego income from other assets they could hold.
ETFS Securities says this opportunity cost changes over time: as interest rates on bonds and deposits rises, the opportunity cost of owning gold rises. But when yields are low the opportunity cost falls, making gold a relatively more attractive investment.
According to the World Gold Council, lower interest rates increase demand for gold.
With the development of ETFs as a way of investing in gold, the metal has gained added momentum in recent years.
ETFS Securities says there are now 74 million troy ounces of gold supporting physically-backed ETFs, providing investors with access to gold on most stock exchanges.
Central bank purchases of gold have also been rising. The World Gold Council says nine central banks have added more than a tonne of gold to their reserves so far this year.