Gold Remains 'Under-Owned' Asset In Portfolios

According to Juan Carlos Artigas, head of investment research with the World Gold Council, gold remains an "under-owned" asset in financial portfolios despite the decade-long surge in prices that began back in 2001. Some gold in a portfolio offers diversification that can help investors at times when tail-risk events hurt other markets.

By Allen Sykora
Friday April 26, 2013
Kitco

Gold remains an “under-owned” asset in financial portfolios despite an increase in investment during the decade-long surge in prices that began back in 2001, says Juan Carlos Artigas, the head of investment research with the World Gold Council.

For one thing, while investment in gold and prices are well up from early in the last decade, so is the amount of money in financial assets around the world, the WGC said. The organization maintains that some gold in a portfolio offers a diversification that can help investors at times when tail-risk events hurt other markets.

Many might think gold is in fact “over-owned” after a long bull market, said Artigas, adding that this is not the case.

“There has been an increase in portfolios but it is still a very under-owned asset,” he said in an interview with Kitco News in conjunction with a fresh WGC report on gold investment. “Gold, on average, is about 1% of global financial holdings, compared to the money put into equity and bond markets.

“Most financial assets, especially debt as well as equity markets, have exploded at unprecedented rates for a myriad of reasons,” he said. One factor is the unconventional monetary policies in developed nations.

The bottom line is that financial assets have grown 10-fold over the past 20 years to $200 million, well ahead of a three-fold increase in nominal gross domestic product, the WGC reported.

Meanwhile, the WGC estimated the private investment stock of gold at $1.9 trillion. The percentage of gold is low due to both the scarcity of gold and unprecedented growth in other financial assets, the WGC said.

The report said the above-ground stock of gold in the world was estimated at 174,100 metric tons as of the end of 2012 worth more than $9.3 trillion. This is pretty much all of the gold ever mined since the metal is “virtually indestructible” and only a fraction is lost through technological and industrial uses. The report said the largest share is held in jewelry worth more than $4.6 trillion. The WGC said central banks collectively hold some 30,100 tons in foreign reserves, while bars and coins make up one-fifth of the above-ground stock, worth $1.9 trillion.

“In the current environment of easy monetary policy and record growth in financial assets, gold has become increasingly relevant as an investment that balances risks in other assets,” the WGC said. “As a real asset, one that cannot be debased or devalued, gold is seen by many investors as a valuable risk management and wealth preservation tool.”

Yet, there are many who still have no exposure to gold. “We think that there is quite a bit of room to grow in terms of investment demand and the market can absorb that demand,” Artigas said.

Gold has value due to its scarcity, yet the market is large enough to allow sufficient liquidity, Artigas said.

“There is only so much,” he said. The WGC report estimated that production increases the above-ground stock at a rate of 1.7% per year. “You are not going to double the amount in the way that paper assets can…But, it is still a big market. It is not so scarce that nobody can access it.”

The WGC report said rapid growth in capital markets means more capital chasing lower returns and tempting investors toward disproportionate risk and thus increasing the frequency of “flight-to-quality episodes.” This has led to an increase in tail-risk events over the past three decades. Gold, said the WGC, offers portfolio diversification since it lacks the credit and counterparty risk of other investments.

“Even by historical standards, gold’s current share of financial assets is low,” the WGC said. “The average ratio of the investable gold stock to the size of financial assets has fluctuated over time. Gold’s share of financial assets has been as high as 14% in 1980, the last year of the previous bull market, and as low as 0.4% in 2000, before the beginning of the current one.”

The ratio grew to 1.2% in 2012 due to increased ownership and price appreciation, the WGC said. “So, while a 14% allocation may prove too high as a strategic holding to many investors, an increase to a more sustainable level is feasible,” the report said. “The gold market is deep and liquid enough to support higher global allocations and a growing investor base, and it is liquid enough to facilitate continued acquisitions.”

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