Central banks and funds are the ones finding most comfort in gold these days. Image Credit: Reuters

Gold is becoming more mainstream, with perceptions of the precious metal changing substantially. Since 2001, investment demand for gold worldwide has grown, on average, at 14 per cent per year.

This has been driven in part by the arrival of new ways to access the market, such as physical gold-backed exchange-traded funds (ETFs), but also by the expansion of the middle-class in Asia, and a renewed focus on effective risk management following the 2008—09 financial crisis in the US and Europe.

Today, gold is more relevant than ever for institutional investors.

While central banks in developed markets are moving to normalise monetary policies — leading to higher interest rates — we believe that investors may still feel the effects of quantitative easing and the prolonged period of low interest rates for years to come.

These policies may have fundamentally altered what it means to manage portfolio risk and could extend the time needed to meet investment objectives.

In response, institutional investors have embraced alternatives to traditional assets such as stocks and bonds. The share of non-traditional assets among global pension funds has increased from 15 per cent in 2007 to 26 per cent in 2018.

Many investors are drawn to gold for its key attributes;

* Returns

* Diversification

* Liquidity

* Portfolio impact

Source of long-term returns

Gold is long considered a beneficial asset during periods of uncertainty, but it has also historically generated long-term positive returns in both good times and bad. Over the past century, gold has greatly outperformed all major currencies as a means of exchange.

This includes instances when major economies defaulted, as well as after the end of the Gold Standard, with the price of gold increasing by an average of 10 per cent per year since 1971.


Gold also enhances portfolios by acting as a diversifier, mitigating losses in times of market stress. Although most investors agree about the relevance of diversification, effective diversifiers are not easy to find.

Many assets are increasingly correlated as market uncertainty rises and volatility is more pronounced, meaning they fail to protect portfolios when investors need them most.

Gold, in comparison, is different. It historically benefits from flight-to-quality inflows during periods of heightened risk. By providing returns and reducing portfolio losses, gold has been especially effective during times of systemic crisis when investors tend to withdraw from stocks.

In addition, due to its dual nature as a luxury good and an investment, gold’s long-term price trend is supported by income growth. As such, when stocks rally strongly their correlation to gold can increase, driven by the wealth effect and, sometimes, by higher inflation expectations.


For large buy-and-hold institutional investors, size and liquidity are important factors when establishing a strategic holding. Gold benefits from its large, global market.

At the World Gold Council, we estimate that physical gold holdings by investors and central banks are worth approximately $3.7 trillion, with an additional $900 billion in open interest through derivatives traded on exchanges or over-the-counter market. In stark contrast to many financial markets, gold’s liquidity does not dry up, even at times of acute financial stress, trading between $140 billion and $180 billion per day through spot and derivatives contracts over-the-counter.

Portfolio impact

The combination of all these factors means that adding gold to a portfolio can enhance risk-adjusted returns. Over the past decade, institutional investors with an asset allocation equivalent to the average US pension fund would have benefited from including gold in their portfolio. Adding 2 per cent, 5 per cent or 10 per cent in gold would have resulted in higher risk-adjusted returns.

This dynamic is likely to persist, reflecting persistent political and economic uncertainty, persistently low interest rates and economic concerns surrounding stock and bond markets.

— Juan Carlos Artigas is Director of Investment Research at the World Gold Council.