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What is Gold's Role in 2022?

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As inflation rises, what happens to gold?

With inflation soaring to 30-year highs, some investors have been disappointed with gold’s performance. While gold has outperformed shares, bonds and TIPS the past six months, its recent showing owes to the Russia and Ukraine crisis. This has caused some to wonder if bitcoin is a better inflation hedge than gold. And wonder what happens to the gold price if Russia fears subside.

To discuss gold’s performance, we were joined by Jaspar Crawley at the World Gold Council, the peak gold industry group.

Jaspar said that one reason gold is struggling in this period of high inflation is how well it did in previous years. In 2019 gold returned about 19%, and in 2020 it returned 26%. That’s around 50% in two years. As such, a lot of investors are selling gold and taking profits, he said.

He added that it is still early in the inflationary cycle and gold remains, historically, one of the best-performing assets when inflation is high. He said: “when inflation is over 3% in Australia, the average returns of gold have actually been about 20% nominal returns.”

Gemma then asked Jaspar what might happen if interest rates keep rising.

Jaspar said gold can underperform when interest rates rise. However, if inflation shoots higher or proves sticky, it will undo the effect of interest rate hikes—potentially supporting the gold price. For this reason, the debate around whether inflation is transitory is very relevant. “You will see gold possibly underperforming during rate hikes, but actually if inflation stays high [rising rates] isn't going to make such a difference.”

How superannuation funds are using gold

Gemma then asked Jaspar how superannuation trustees might use gold—if at all—in today’s environment.

Jaspar replied that superannuation funds have seen their returns decline steadily over the past 15 years. In 2005 the average return was around 11%. Pre-pandemic, they’d fallen to 6%. During the pandemic year, they were negative on average.

Superannuation trustees have responded to these declining returns by taking more risk, Jaspar said. They’re placing bigger bets on equities and moving into unlisted assets like infrastructure.

In this setting, gold can offer superannuation funds three things. The first is better returns. “The compound annual growth rate of gold in Aussie dollars since 1971 is just shy of 9%. I think most superannuation funds would take that as a return on an asset,” he said.

The second is better diversification. When the ASX 200 drops, gold tends to do well. This is something we saw during 2020.

Thirdly, is liquidity. As more super funds move into illiquid alternatives, they may recall that gold is also an alternative—but one that is highly liquid. (Gold trades something near $190 billion a day).

Is bitcoin the new gold?

We end our discussion by talking about bitcoin. Investors sometimes ask if Bitcoin is digital gold.

Jaspar said while there are some superficial similarities – scarcity being the main one – there are more differences.

A big difference is liquidity. Whereas gold trades hundreds of billions of dollars a day, cryptos trade far less than this. Another big one is regulation. The gold market is highly regulated and central banks use gold. Crypto is neither of these things. The final major difference is that gold has many other uses than trading and finance. Gold is also used in jewellery and industry. Crypto is not.