Gold Bullion Retains Key Role Of A Major Diversifier

2015 was a troubling year for the financial markets. Across currencies, commodities, equities and fixed income, full year performance was lacklustre in terms of aggregate returns and worrying in terms of risk metrics. Market volatility at the outset of 2016 suggests we are likely to see more volatility in 2016.

- 2015 and start 2016 “worrying” for markets
- Gold’s long term performance strong in all currencies (see table)
- “Improved performance in market for gold coins”
- “Demand for U.S. Mint issued gold coins rose 45.6% y/y in weight terms”
- “2015 the third busiest year over the last ten years”
- Gold has key role of a major diversifier in portfolios

In contrast, gold performed relatively well, compared to other commodities, coming out of 2015 with negative returns more mild than those for silver, wheat, copper, and oil (both Brent and WTI). About the only major commodity that outperformed gold in 2015 was corn, with price downside in corn controlled by poor supply due to inclement environmental factors.

In dollar terms, gold was down 10.4% y/y through December 31, 2015, with last month decline of 0.3% m/m being comparable to the performance of the Barclays US Aggregate Bond Index. This ranked gold in dollar terms as 5th worst performing asset class across 21 broader class indices in yearly terms and 7th best performing in terms of December 2015 performance.

In simple terms, gold played reasonably well its historical function as a hedge against emerging markets bonds, emerging markets equities and broad commodities indices, as well as oil.

In addition, gold continued to act as a hedge against key currencies. As the result, as shown in the table below, gold performed strongly in terms of currencies that experienced significant devaluations against the USD, JPY and Euro, while suffering against core advanced economies’ currencies, with exception of AUD and CAD.

Gold’s defensive positioning was further confirmed by its resilience to volatility.  As chart above indicates, gold price volatility (based on 26 weeks rolling standard deviations) continued to decline over 2015 compared to previous years. This stands contrasted with rising volatility in a range of other asset markets, especially in fixed income, and with improving performance over the course of the year – as contrasted by the global equity markets that witnessed some 48 national stock markets indices falling into a bear market over the course of the year.

Through December 31, 2015, ex-US Emerging Markets bonds were down 5.5% y/y, repeating negative returns over 1, 3 and 5 year horizons, while ex-US corporate bonds were down 9.8%. High yield corporate bonds (ex-US) fell 9.3% while US high yield paper was down 5%. In equity markets, MSCI EAFE (index covering Advanced Economies equities ex-US) was down 0.8%, with negative returns accelerating in 4Q 2015, while Russell 3000  (broadly based US equity index) was up only 0.5% y/y, albeit down 2.1% in December compared to November. Similarly, S&P 500 managed to end the year on a weakly positive note, rising 1.4% y/y, while falling 1.6% m/m in December.

In line with other asset classes, Bloomberg Commodity index covering broad range of global commodities was down massive 24.7% y/y, with December monthly fall-off measuring 3.1%. The Index is now down 17.3% over the last 3 years and 13.5% over the last 5 years. While index components were generally in the red across all commodities, crude oil (WTI) was the general underperformer within the commodities class, falling 30.6% y/y in 2015 and down 26.1% over the 3 years through December 2015, as well as down 16.2% over the last 5 years.

The theme of defensive positioning of gold holdings in diversified portfolios was reinforced by improved performance in the markets for gold coins.

The above was driven primarily by robust demand in the advanced economies where gold coins serve as traditional store of wealth functions for longer term savers and as a vehicle for inter-generational wealth transfers by retail investors (see What Gold Coins Sales Tell Us  ).

Chart below shows  full year demand for American Eagle and Buffalo Gold coins. Over 2015, demand for U.S. Mint issued gold coins rose 45.6% y/y in weight terms, making 2015 the third busiest  year over the last ten years. Average coin sold in 2015 contained 0.5 oz of gold, representing the lowest average since the series for Buffalo coins became available in 2006. This signals more prominent role in the market for U.S. Mint coins from smaller retail investors – a sign of continued interest by savers in Gold coins.

Hence, overall, gold prices evolution over 2015 closely tracked both global macroeconomic and markets trends, allowing gold to retain some of its core defensive and hedging properties vis-à-vis global currencies and fixed income, as well as oil and a range of other commodities.

Declining volatility trend, present from 2012 on is further reinforcing the argument that gold retains a key role of a major diversifier in well-structured retail investment and pension portfolios, despite continued pressures on spot prices.

Dr Constantin Gurdgiev

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Courtesy of http://www.goldcore.com/