For Shaokai Fan, head of APAC ex-China at the World Gold Council (WGC), gold stands out as a portfolio diversifier, particularly for Australian investors.
Speaking to InvestorDaily, Fan explained that unlike other commodities, gold’s performance is not closely tied to the economic cycles of commodity-producing countries like Australia.
“Australia is a large commodity-producing country, so there’s a feeling or a belief that the Australian economy, the Australian dollar, is going to be more synchronised with commodity cycles and therefore, buying an asset that most people think is a commodity may not be beneficial because it’s going to be aligned with the economic cycle of Australia,” Fan said.
“But one of the messages we’ve been trying to put out there is that yes, of course, Australia is a very large gold producer, but gold’s performance, its financial behaviour, is actually very different than other commodities, in fact, than many other assets in general, and that’s one of the most attractive elements of holding gold in your portfolio.
“The behavior is so different than equities, fixed income, commodities, cryptocurrencies even, that holding gold helps to bring diversification benefits to your portfolio and might help to improve long-term risk adjusted returns.”
Gold’s unique diversification benefits stem from its ability to perform well in both pro-cyclical environments – where demand for jewellery and industrial use rises during economic growth – and counter-cyclical scenarios, where investment demand increases during market uncertainty.
This duality makes gold relatively uncorrelated with other asset classes, providing significant diversification benefits, Fan explained.
“You have a very mixed bag in terms of the different factors of demand that influence gold and that leads to a very idiosyncratic price performance for gold,” he said.
“It makes the gold price relatively uncorrelated to other asset classes. Equities, in general, are procyclical – when times are good, equity prices go up. Fixed income, generally speaking, is counter-cyclical.
“Gold is a mix of both, and therefore, the price doesn’t really correlate that much to anything else. It gives you excellent diversification benefits because it performs so differently than everything else.”
When comparing gold to cryptocurrencies like bitcoin, Fan acknowledged some superficial similarities, such as limited supply and their appeal as alternatives to fiat currencies.
However, he argued that the two assets are quite distinct.
“There have been a couple of very stark examples of how different these asset classes are. On the day Russia invaded Ukraine – a major risk-off event, certainly an event that most people were not predicting – the gold price predictably went up because gold is a safe haven asset. It generally goes up when there’s market turbulence,” Fan said.
“[But] the price of bitcoin went down significantly. So, if you want to say that it’s digital gold, well it’s certainly not a safe haven asset, it didn’t perform that way.”
Oil, another commodity often compared to gold, also exhibits stark differences.
Fan pointed out that oil’s supply is more vulnerable to geopolitical shocks, given its concentrated production regions, whereas gold’s global production base makes it less susceptible to such disruptions.
“We’ve done some analysis on this. The correlation between them is very low and it makes sense when we think about it from a fundamental level, from a supply point of view for instance,” Fan said.
“Oil is produced in certain areas of the world where either conflict, blockade, or some type of geopolitical turbulence might suspend or disrupt that supply, so that has a very clear supply shock as we’ve seen both in recent years and historically as well.
“Gold is mined on every continent except for Antarctica, so the supply is much less susceptible to a specific supply shock. Russia, for instance, has been sanctioned after the invasion of Ukraine and it’s actually the third or fourth largest producer of gold – but that hasn’t really sent a major shock to the gold market.”
Additionally, while oil primarily serves economic functions and has limited counter-cyclical uses, gold retains intrinsic value, with a significant portion of its supply coming from recycling.
The differences between these three assets underscore the importance of understanding their unique characteristics, Robin Tsui, APAC gold strategist at State Street Global Advisors, recently underscored.
“We found oil has historically been a better inflation hedge, I think that’s why we advise clients to have both. You have a strategic allocation to gold as a hedge against market risk, but then you have some sort of allocation to oil and other commodities to provide that inflation hedge,” Tsui told InvestorDaily earlier this month.
