As global economic challenges persist, gold has proven itself to be an increasingly valuable asset. Over the past year, the price of gold has surged by an impressive 48%, climbing from $3,120 to a record high of $4,630 per ounce. This unexpected rally comes despite the common belief that gold would struggle with rising interest rates and a stronger US dollar—factors that typically diminish its appeal.
Unlike income-generating assets like bonds and high-dividend stocks, gold doesn’t yield dividends, which is one of the primary concerns for potential investors. Additionally, when the US dollar strengthens, it can make gold more expensive for international buyers, dampening global demand. Yet, despite these challenges, the precious metal has continued its upward trajectory. What’s driving this growth, and what does it mean for your portfolio?
The Global Economic Landscape
The ongoing global uncertainty is a significant factor in gold’s rise. While China is dealing with deflation, the US faces persistent inflation and ballooning government debt. With the US government needing to issue more bonds to fund its record deficit, bond yields are rising. Nevertheless, gold remains steadfast, signaling a broader shift. Investors are increasingly viewing gold as a hedge not only against interest rates and currency fluctuations but also against potential government fiscal crises.
The US national debt has skyrocketed from $23 trillion to over $36 trillion in just five years, raising concerns about the government’s long-term fiscal sustainability. This growing debt puts pressure on the Federal Reserve’s ability to combat inflation, which has significant implications for the markets. Rather than maintaining high interest rates, the US government may allow inflation to remain elevated for years—a strategy that gradually reduces the real value of the debt.
While this approach benefits governments, it harms savers and retirees, particularly those relying on fixed income. This is why Australian retirees and Self-Managed Super Funds (SMSFs) should consider adding gold to their portfolios, despite its lack of dividends.
The Case for Gold in Australian Portfolios
Many Australian investors, particularly those in SMSFs, are heavily concentrated in property, ASX 50 stocks, and cash, all of which have underperformed in real terms due to rising interest rates. Gold, however, has provided far stronger returns. It serves as a hedge against inflation, preserving purchasing power in ways that cash and bonds cannot, especially during inflationary periods.
Gold also offers diversification benefits, historically demonstrating a negative correlation with Australian shares. This makes it an effective tool for reducing overall portfolio risk. Over the past five years, gold has significantly outperformed government bonds, establishing itself as a reliable choice for defensive investors seeking long-term growth.
Additionally, gold is more liquid and has lower costs compared to other asset classes such as private credit. This makes it an accessible and efficient option for those looking to diversify their portfolios without incurring excessive fees.
The Underutilization of Gold
Despite its strong performance, many investors, particularly in super funds, hold minimal exposure to gold. According to Bank of America, 71% of investors allocate less than 1% of their portfolios to the metal. This is a concerning trend, especially for SMSFs where high concentrations in property and shares could lead to significant downside risks in volatile markets.
In our own portfolio, we increased our allocation to gold to 14.8% in early 2021. Since then, gold has surged 90%, while government bonds have struggled to keep up with inflation. Our analysis shows that allocating at least 10% of a superannuation portfolio to gold can significantly enhance its risk-adjusted returns without sacrificing long-term performance.
As the demand for stronger inflation hedges rises, it’s likely that more super funds will consider shifting from government bonds to gold in search of better protection against economic uncertainty.
How to Invest in Gold
There are several ways for SMSFs and retail investors to gain exposure to gold. One option is through Exchange Traded Funds (ETFs), such as GOLD and PMGOLD, which offer an easy way to invest in gold without the need for physical storage. GOLD, in particular, has seen substantial growth, surpassing $4 billion in assets under management, driven by the strong gold price and a weak Australian dollar.
Alternatively, investors can consider allocated and unallocated bullion accounts, with providers like ABC Bullion and the Perth Mint offering direct ownership options. For those looking to hold physical gold, purchasing bars or coins is another option, though it requires consideration of storage and insurance costs.
Despite the strong performance of gold, many Australian super funds remain underexposed to it, meaning investors are missing out on its potential returns and diversification benefits. With rising inflation risks and mounting concerns about government debt, now is the ideal time to review your investment strategy and increase your allocation to gold.
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