The reigniting of the US-China trade dispute by president Donald Trump earlier in the month has seen a sell-off in markets, after a seemingly resolved issue and a key contributor to last year’s dire performance came back to the fore.
As such, some have begun to question whether traditional safe-haven asset gold could provide some protection against the current uncertainty in markets.
“Gold can be a useful diversifier to a wider portfolio as it is not necessarily correlated with other financial assets,” said Jason Broomer, head of investment at Square Mile Consulting & Research.
“This is useful at a time when the growth assets are broadly correlated with one another and uncorrelated assets such as government bonds are hugely expensive.”
Last year proved something of a roller coaster ride for the gold market.
The yellow metal prices had to contend with higher interest rates, a strong dollar, and rising stock prices for much of the year.
It wasn’t until Q4, when global stocks tumbled as a result of escalating geopolitical and macroeconomic risks, that gold prices rebounded, closing the year at around $1,280 an ounce, just one per cent down for the year.
In the end, however, gold outperformed almost all other global financial assets.
As such, global demand for gold grew to 1,053 tonnes during the first quarter of 2019, up 7 per cent on the same period last year, according to the World Gold Council’s latest Gold Demand Trend report.
This year-on-year increase was largely due to continued growth in central bank buying, as well as growth in gold-backed exchange-traded funds (ETFs).
The World Gold Council, a trade body for the gold industry, said that this momentum could be set to continue for the rest of the year.
Indeed, market uncertainty and the expansion of protectionist policies are two of the major trends that the trade body believes will play a key role in defining gold’s performance during 2019.
Other trends it highlighted are higher interest rates and continued dollar strength. However, these effects are likely to be dampened as the Federal Reserve takes a more neutral stance, while other central banks normalise monetary policy.
In addition, the trade body said, central banks will keep expanding the use of the precious metal in foreign reserves in years to come.
“Against this backdrop, we believe that gold will be increasingly relevant as investors seek return, liquidity and diversification opportunities,” they noted.
Aneeka Gupta, associate director of research at ETF provider WisdomTree Investments, said there are several reasons why gold should be due a rebound this year.
She said the strong equity rally we saw at the beginning of 2019 fizzled out because hopes for a speedy resolution of the US-China trade disputes were dashed.
Gupta explained: “The result is that from a de-escalation, we’re going back to a re-escalation of trade wars.”
As such, the return of risk aversion globally should fuel demand for gold particularly as it is currently undervalued and tends to perform best in times of economic uncertainty.
Yet, rather than potential upside, it is the precious metal's other properties that has got fund managers looking to add more exposure recently.
Peter Elston, chief investment officer of Seneca Investment Managers, has been vocal about the need to prepare for a global downturn for the past two years, with gold one of his preferred strategies.
“We’ve been gradually moving further underweight equities for a good while and as markets have become more volatile this has paid off for our investors,” he explained. “Our entry into gold is another decision that reflects our existing view, whether the physical gold ETC [exchange-traded commodities] or the gold miners fund.
“Indeed, physical gold we see as a good cash alternative for when central banks are debasing currencies in order to boost economies.”
Seneca’s Elston is investing in a gold miners fund as part of his equity allocation. “And we’ve put some of our cash allocations into a physical gold fund. We’re also ready to increase these exposures over the next couple of years as opportunities present themselves.”
The multi-asset team at the Miton Group has also been adding to their gold holdings, recently investing via a physically-backed ETF to help protect it from other market events.
“We hold gold across our range of risk-differentiated multi-asset funds, as a hedge against geopolitical risk, inflation risk and, more generally, as a hedge against market risk-off events,” said Miton fund manager Anthony Rayner.
Adrian Ash, director of research at BullionVault, sees a particular relevance of gold to UK investors amid uncertainty over Brexit and political uncertainty following the resignation of prime minister Theresa May.
“For UK investors the weakening pound has already helped gold rise back above £1,000 per ounce, just 7 per cent below its current all-time high of 2011,” he said. “The risk of sterling crashing further on a bad Brexit or Corbyn government makes gold a simple hedge.”
However, like any investment, gold is not without risk.
For starters, cautioned Square Mile’s Broomer: “Gold tends to be volatile, so only a modest exposure may be required.”
Sensca’s Elston also warned that there is no income, no dividend, no interest when it comes to gold as investment.
“In fact, it’s a negative yielder as you need to pay, directly or indirectly, for storage costs,” he said.
What’s more, said Bullionvault’s Ash, gold's role as insurance is far from guaranteed. “On a monthly basis, gold has risen in 96 per cent of all five-year periods since 1968 that the FTSE All Share has lost value.
“The other 4 per cent came in the early-1990s recession, when UK house prices crashed, and equities showed a loss from the 1987 spike.”
The notion that gold protects from devaluation of currency by centrals banks’ money-printing “doesn’t sit well” with Craig Brown, investment specialist for Rathbone multi-asset portfolios.
“Gold tends to be a poor way of protecting your wealth from inflation,” he explained. “However, it has historically attracted many investors when things get rocky, pushing its price higher still. So, holding a small amount can be a good way to reduce the volatility of your portfolio.”