by Christopher Dhanraj
Chris explains the pros and cons of holding some gold as part of a multi asset portfolio.
The recent uptick in geopolitical tensions and concerns over a potential growth slowdown has pushed an ancient metal back into the spotlight: gold.
Global investors have increased their positions in gold exchange traded funds (ETFs) by $4.3 billion from May 14th, one day after the S&P 500 Index’s 2.4% trade tension driven drop, through June 20th. This pushed the year to date total of ETF flows into gold focused products back into positive territory. The Bloomberg Gold Index rallied more than 8% over this time frame. (Source: Bloomberg, BlackRock, as of June 20th, 2019. Notes: Flows are globally listed ETFs.)
Gold’s performance at times of geopolitical volatility underscores its potential value as a portfolio diversifier. However, gold has also performed well amid strong equity markets this year as real interest rates fell, as my colleague Russ Koesterich discussed in March.
But just as there are many “goldbugs” who are enamored by the asset, there are many skeptics who raise legitimate questions about it. We investigate potential merits of adding gold to portfolios below:
From pharaohs to photosynthesis: the industrial and investment case for gold
Interest in gold is as old as civilization itself, with the earliest known usage of the metal dating back to the early Bronze Age (4th millennium BC). Today, demand for the metal continues to come from central banks, investors, jewelers–as well as commercial applications. Scientists have even developed a way of achieving artificial photosynthesis through leveraging gold particles as a catalyst.
Still, a high proportion of annual demand for gold is based solely on investment demand. This can expose the price of the metal to a large amount of speculation. The World Gold Council data suggests that only 59% of demand is for commercial uses; 26% of 2018 gold demand was for investment purposes while another 15% was demanded by central banks. 
Three reasons to consider holding gold
Against that backdrop, there are three arguments for holding gold in a portfolio:
- Historically, gold has been a diversifying compliment to a traditional stock and bond portfolio throughout market cycles. The below matrix illustrates that the correlation between monthly returns of gold and other asset classes has low or negative correlations to other major asset classes.
- Gold’s out-performance in recessions: In the deepest draw-downs of the past three recessions, gold has outperformed all other asset classes, when investors again tend to flock to “safe-haven” assets. While BlackRock continues to see the current late-cycle dynamic persisting, holding gold in a portfolio can provide potential diversification benefits should a recession arise.
- Potential inflation hedge: Though the market currently sees little prospect for inflation, investors who wish to add an asset that offers a potential inflation hedge should consider gold. It is important to note that the level of real interest rates – the interest rate after inflation – is a key driver of gold returns.
Risk factors to consider
Several other risk factors to consider when it comes to gold is that the commodity generates no cash flows, no earnings, and requires storage costs. This has influenced gold’s under-performance of traditional stocks and bonds over the longer term, since dividends and coupon payments are crucial drivers of total returns for stocks and bonds.
Additionally, as a commodity, the physical supply and demand of gold is crucial idiosyncratic driver of the commodity. On the demand side, central bank, investor and consumer preferences for the commodity have been relatively stable overtime, but they are subject to change. On the supply side, an increases in mine production could also weigh on gold.
In the shorter term, gold may face other headwinds. Lack of inflation may reduce its attractiveness and investors may shun the asset class should the market see a strong risk-on rally.
Gold has the potential to shine in times of market and geopolitical volatility. A small allocation to gold may be suitable for investors who are looking to real assets to diversify their portfolio. However, investors should balance the sizing of their position given the lack of yield and low current inflation expectations.
Related iShares Funds
iShares Gold Trust (IAU)
iShares Gold Strategy ETF (IAUF)
 Source: Bloomberg, BlackRock, as of June 20th, 2019. Notes: Flows are globally listed ETFs.
 Source: World Gold Council, as of March 31st, 2019. Notes: Data is for 2018 and from the World Gold Council’s “Gold Demand Trends” report.
This information must be preceded or accompanied by a current prospectus. Investors should read and consider it carefully before investing.
Investing involves risk, including possible loss of principal.
Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.
The price of gold and precious-metal related securities historically has been very volatile and may adversely affect the financial condition of those companies. The production and sale of precious metals can be affected by economic, financial and political factors, which may be unpredictable and significantly impact supply and prices.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
Commodities’ prices may be highly volatile. Prices may be affected by various economic, financial, social and political factors, which may be unpredictable and may have a significant impact on the prices of precious metals. Investing in commodity-linked derivatives and commodity-related companies may increase volatility. Price movements are outside of the fund’s control and may be influenced by weather and climate conditions, livestock disease, war, terrorism, political conflicts and economic events, interest rates, currency and exchange rates, government regulation and taxation.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
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Specific To IAUF:
The fund is a commodity pool, as defined in the Commodity Exchange Act and the applicable regulations of the Commodity Futures Trading Commission, or “CFTC,” and is managed by its Advisor, BlackRock Fund Advisors, a commodity pool operator registered with the CFTC.
The Fund’s use of derivatives may reduce the Fund’s returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. Commodity futures trading may be illiquid. In addition, suspensions or disruptions of market trading in the commodities markets and related futures markets may adversely affect the value of the Fund. Certain derivatives may give rise to a form of leverage and may expose the Fund to greater risk and increase its costs. To the extent that the Fund invests in rolling futures contracts, it may be subject to additional risk. An increase in interest rates may cause the value of fixed-income securities held by the Fund to decline.
Investing in commodity-linked derivatives and commodity-related companies may increase volatility. Price movements are outside of the Fund’s control and may be influenced by weather and climate conditions, livestock disease, war, terrorism, political conflicts and economic events, interest rates, currency and exchange rates, government regulation and taxation. Commodity futures trading may be illiquid. In addition, suspensions or disruptions of market trading in the commodities markets and related futures markets may adversely affect the value of the Fund.
Specific To IAU:
The iShares Gold Trust is not a standard ETF. The Trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. Because shares of the trust are intended to reflect the price of gold held by the trust, the market price of the shares is subject to fluctuations similar to those affecting gold prices. Before making an investment decision, you should carefully consider the risk factors and other information included in the prospectus. The sponsor of the trust is iShares Delaware Trust Sponsor LLC (the “Sponsor”). BlackRock Investments, LLC (“BRIL”), assists in the promotion of the Trust. The Sponsor and BRIL are affiliates of BlackRock, Inc.
Shares of the Trust are intended to reflect, at any given time, the market price of gold owned by the Trust at that time less the Trust’s expenses and liabilities. The price received upon the sale of the shares, which trade at market price, may be more or less than the value of the gold represented by such shares. If an investor sells the shares at a time when no active market for them exists, such lack of an active market will most likely adversely affect the price received for the shares.
Gold Spot Prices provided by The Bullion Desk. No warranty is given for the accuracy of these prices and no liability is accepted for reliance thereon. Prices are provided on a reasonable efforts basis and delays may occur both because of the delay in third parties communicating the information to the site and because of delays inherent in posting information over the internet. Prices shown are indicative only and do not represent actionable quotations on prices of actual trades.
Following an investment in shares of the Trust, several factors may have the effect of causing a decline in the prices of gold and a corresponding decline in the price of the shares. Among them: (i) Large sales by the official sector. A significant portion of the aggregate world gold holdings is owned by governments, central banks and related institutions. If one or more of these institutions decides to sell in amounts large enough to cause a decline in world gold prices, the price of the shares will be adversely affected. (ii) A significant increase in gold hedging activity by gold producers. Should there be an increase in the level of hedge activity of gold producing companies, it could cause a decline in world gold prices, adversely affecting the price of the shares. (iii) A significant change in the attitude of speculators and investors towards gold. Should the speculative community take a negative view towards gold, it could cause a decline in world gold prices, negatively impacting the price of the shares
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