Investors Are Shifting Back Into Gold. It Looks Like a Smart Move. - Barron's

With no opportunity cost to holding a zero-yield asset such as gold, investors increasingly are adding it to their portfolios as a hedge. Photograph by Andrey Rudakov/Bloomberg

“Nice rock.” That was the dismissive assessment of gold by a snarky investor in a recent television advertisement for a cryptocurrency fund. She apparently was unperturbed by the massive, 50%-plus drop in Bitcoin from its peak in late 2017, and equally oblivious to the bull market in the barbarous relic the past couple of years.

In fact, there has been a stealth move to gold in the past year, both by investors buying exchange-traded funds that hold the metal and central banks, which have been shifting a portion of their reserves from traditional paper currencies, notably the U.S. dollar, to the monetary metal, according to J.P. Morgan’s global markets strategy team led by Nikolaos Panigirtzoglou.

Despite the U.S. stock market’s ascent to records, mutual fund investors have been surprisingly cautious. They have yanked money from equity funds and poured $1 trillion into bond funds despite historically low yields in 2019, a pace that appears to have continued in the new year, the JPM analysts write in a client note. They have also poured money into gold ETFs, boosting the ETFs’ assets back to their highs of 2012, shortly after bullion peaked near $1,900 an ounce.

Since late 2018, when Barron’s published a bullish cover story on gold investing, the metal is up more than 30%, with the front-month futures contract settling Tuesday at $1,569.20. In the final installment of this year’s Barron’s Roundtable, Sonai Desai, portfolio manager and chief investment officer for fixed income at Franklin Templeton, endorsed gold ETFs, such as SPDR Gold Shares (ticker: GLD), as a hedge against the risk of market and geopolitical volatility.

Panigirtzoglou’s team sees gold as an underowned asset, both by individual as well as institutional investors, despite the inflows into the metal in the past year or so. They see further scope for increased allocation to gold in their asset mixes.

Within ETFs, investors have boosted their absolute holdings of gold back to their 2012 peaks, representing over 80 million troy ounces of the metal, according to the JPM team. That, however, is equal to only 0.3% of worldwide stock, bond, and money-market funds’ assets, about half gold’s percentage at the historic high in 2012. If physical holdings of gold bars and coins also are included, gold’s allocation equals 4.5% of those funds, well below the peak of 7% in 2011-12, they add.

Central banks, for their part, have lifted their allocation of reserves in the metal from previously depressed levels to closer to their historical averages, around 12% of assets.

The JPM team believes that could go higher as emerging market central banks lift their allocations to gold from their current 5%. China holds only 3% of its vast reserves in gold, and the bank’s analysts think its monetary authorities “will most likely continue to accumulate gold at a strong pace over the coming years, perhaps towards doubling their allocation from current levels, in order to diversify away from dollar reserves.”

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That is at the core argument for gold. Central banks globally have printed paper currencies at an unprecedented rate, lowering interest rates below zero (either after adjusting for inflation or in absolute terms). So far, that has pushed up the price of assets from stocks and bonds to real estate and collectibles. But with no opportunity cost to holding a zero-yield asset such as gold, investors increasingly are adding it to their portfolios as a hedge.

What’s especially striking is the accumulation by central banks, which mainly have held U.S. dollars as reserves. The diversification away from greenbacks is perhaps a sign of a movement away from a U.S.-dominated world. Will the global economic and financial system be dollar-centric in another generation? Or will the U.S. dollar cede primacy, as the British pound did more than a century ago?

These are questions that long-term investors should consider. An inert lump of metal doesn’t create value, as does a corporation, the ownership of which is represented by common stock. Neither does it pay interest, as a bond does. But gold retains its intrinsic value, something no paper currency has managed to do over history.

Gold is insurance. Insurance isn’t supposed to make you rich; it’s supposed to keep you from being poor. The best thing to happen is your insurance never pays off because nothing bad happens. Hope for the best, but better to prepare for the worst. A nice rock can help.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

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