In 2020, all that glittered was gold

Uncertainty around the global economy will not only support gold as an asset class but also drive consumption of the precious metal, especially in emerging markets, according to the latest Gold Outlook 2021.

This follows gold being one of the best-supported asset classes in 2020 as a combination of high risk, low-interest rates and a rising gold price boosted it.

All these factors resulted in gold, when compared to other asset classes, having one the lowest drawdowns, which is a measure of an asset’s value at its peak against its lowest point in a year.

By investing in gold, investors limit losses and manage volatility risk in their portfolios.

The use of gold as a defensive asset was not the only factor driving interest in the metal.

Over the past year, the gold price has surged from $1 522 (about R22 700) per ounce (oz) to its current price of around $1 833/0z.

Consumers of gold

Stephán Engelbrecht, a fund manager at Anchor Capital, notes that emerging markets are great consumers of gold, making particular reference to India.

He says any increase in demand would be driven by the jewellery market and to a lesser extent the need for computer chips and processors.

He stresses, however, that gold as a store of value is by far its greatest utility. “We doubt that greater demand from jewellery and industrial use will be enough to drive the gold price higher if interest rates were to rise,” he says.

This view is backed by the report.

“Investors’ preference for physical and physical-linked gold products last year further supports anecdotal evidence that this time around, gold was used by many as a strategic asset rather than purely as a tactical play.”

Krishan Gopaul, market intelligence manager at the World Gold Council, believes the low-interest rate environment removes the opportunity cost of investing in gold.

“Going forward, we believe that the very low level of interest rates worldwide will likely keep stock prices and valuations high. As such, investors may experience strong market swings and significant pullbacks,” says Gopaul.

The report notes that gold has also been known to perform well in high inflation scenarios and equity market pullbacks.