Gold’s historically low correlation with stocks and bonds makes it an essential hedge against market risks, recommended for a strategic portfolio allocation of 2 to 5 per cent, said a market strategist.
Speaking in an upcoming episode of the Relative Return podcast, Robin Tsui, the APEC gold strategist at SSGA, said this strategic allocation can significantly enhance portfolio stability and improve risk-adjusted returns amid market uncertainties.
Year to date, gold prices are up by about 22 per cent in Australian terms, supported fundamentally by three factors, Tsui said.
The first factor is the significant increase in central bank purchases, particularly notable among emerging markets such as China, India, and Turkey. These banks are expanding their gold reserves to hedge against currency risks, viewing gold as a stable asset compared to fiat currencies.
The second reason is the strong investor demand for gold, particularly in the APAC among both institutional investors and intermediaries. This trend correlates with the last reason – the rise in geopolitical risk, which has triggered increased safe-haven buying.
This third factor, in particular, is expected to continue pushing gold prices higher.
“What we see at the tail risk events and also the market risks we expect to see in the coming months because of the elections, and we find that in the US particular devaluations, it’s getting quite stretched as well. So we have, especially investors, that are getting more concerned about potential corrections in global equities, gold can actually protect the allocation to stocks and bonds,” said Tsui.
“So we do recommend a small strategic allocation to gold in a portfolio, because gold can actually interplay with some of the asset classes that average investor might have. We recommend about 2 to 5 per cent of strategic allocation in a portfolio, and that will substantially reduce the overall portfolio’s volatility and potentially improve the portfolio risk-adjusted returns.”
Historically, Tsui explained, gold has delivered an annualised return close to 8 per cent since 1971, aligning it with global equities’ performance and highlighting its potential for capital appreciation.
“Some investors don’t realise the capital appreciation potential, but during market downturns, that’s where gold can actually provide that diversification benefit,” he said.
Moreover, Tsui highlighted that during market downturns, gold has demonstrated its diversification benefits, with its price typically rising by about 5 per cent when the S&P 500 experiences a downturn of more than 10 per cent, making it an increasingly attractive option amid growing market risks and global tensions.
“I think that’s the reason why investors increasing more into gold, they’re getting more interested because the risks ahead, they probably can foresee that there’ll be more tail risks ahead going forward, because, as I mentioned, the market risks, the tensions around the world as well,” Tsui said.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
