What You Need to Know
The extraordinary return from gold in recent months, followed by an abrupt spike in volatility, ensures that questions about gold allocations come up in every single client meeting. But investors worry whether, after such a rally, there is still a case to own gold. We maintain our recommendation for a strategic allocation as part of an allocation to non-fiat, zero-duration assets.
In the absence of a plausible price target, the case for holding gold rests on its zero correlation with equities at any level of inflation and in the context of a strategic overweight view on equities. The long-run real return from gold is only 0.57% pa and has been episodic. However, the geopolitical imperative to de-dollarize implies a future return above this long-run average.
There remains a very heightened tactical risk, arising from investor demand for gold being far ahead of demand via jewelry to an extent that we have not seen before. We also show the extreme level of retail investor interest. Investors are likely to be fickle and sell as the trends breaks, hence we think that there is volatility complacency for gold; in the near-term, investors need to position for increased gold volatility as a tactical overlay on that strategic positive position.
Despite the topic of gold coming up in every meeting, the extent to which investors are actually invested varies enormously. Tactical risks aside, we think that the progression to a new investment regime implies that our strategic case for gold still stands — more investors need to contemplate an allocation.
