The value of gold is down this year, but 2021 follows two years of outstanding returns and makes the asset class a continuing attractive investment, according to George Milling-Stanley, chief gold strategist at State Street Global Advisors, a Boston-based investment management company with $3.9 trillion in client assets as of June 30.
“There are substantial tailwinds for a significant rebound in gold in the fourth quarter and the first quarter of next year,” Milling-Stanley said in a recent interview. “With risk asset valuations continuing to rise, there is significant potential for more of the volatility we have seen of late, which will heighten the lure of gold as an investment.
“Couple this with rising inflation and you have the recipe for gold to act as the most attractive safe-haven asset for investors to not only generate returns in their portfolios, but also provide downside protection,” he added.
India and China account for half of the commercial demand for gold in the world, and several holidays where gold gifts are traditional are on the horizon, which impacts the investment gold market, he said.
Interest rates also come into play, with low interest rates being good for the gold market as a valuable, stable commodity that generates returns, he said, adding that volatility in the traditional market sectors makes gold more attractive.
When investors were using the traditional 60/40 split for equities and fixed income, portfolios could have an allocation to gold of 2% to 10% and see added returns. Now that 60/40 has been losing favor, the most advantageous level for increasing returns and safeguarding against risk is a 10% allocation to gold, Milling-Stanley said.
In 2019, gold was up 18% in price and in 2020 it was up 24%, far outpacing equities. So far this year, gold is down 10%, but that will reverse itself, Milling-Stanley said.
According to State Street Global Advisors’ latest quarterly report, “Gold as a Strategic Asset Class,” gold has advantages as an alternative investment because it has the potential to enhance portfolio construction strategies on several fronts, including risk management, capital appreciation and wealth preservation, which supports strategic investment efforts across multiple business cycles.
“Based on gold’s historical diversification and positive risk-adjusted returns during market turbulence, it has a track record of potentially helping to temper short-term volatility and limit downturn,” the report said.
Gold also can be used as a long-term wealth preservation strategy because it can remain stable through various business cycles. It can help investors weather unforeseen risks and capital impairments that can erode a portfolio’s value over time, according the State Street Global Advisors. It also can provide a liquidity that real estate or other assets cannot provide.