The flow of institutional gold in November may have caused some market watchers to reminisce of gold’s run between 2008 and 2013, one that saw the yellow metal reach a new all-time high in 2011 before a fairly sharp decline. After a lengthy absence, institutions jumped into the gold market with record purchases this year due to unprecedented uncertainty, only to reduce their holdings by a substantial margin on what looks to be improved sentiment (the release of a COVID-19 vaccine and an anticipated surge in customer spending).
Yet little has changed in terms of gold’s fundamentals and, as Friday’s trading session showed, in terms of gold’s price movement. Despite the large institutional outflows, gold hit a high of $1,890 on Friday, not too far off from the $2,070 peak set in August. According to State Street Global Advisors’ George Milling-Stanley, there aren’t too many reasons to compare gold’s current run to that of a decade prior, aside from the bullish prospects themselves.
Why is gold’s bull run different this time?
In a web seminar hosted by the firm, the chief gold strategist elaborated upon the differences between the two bull runs and why gold investors have more cause for optimism than concern heading into 2021. Milling-Stanley described gold’s last run as frothy in regards to investors chasing gains, though he nonetheless noted that it helped establish a new price range for gold, moving the metal from around $250 to $1,000.
Adam Perlaky, manager of investment research at the World Gold Council who also participated in the seminar, outlined a key point to look out for when anticipating gold’s movement over the coming years. Previously, portfolio managers have held steadfastly to the 60/40 stock/bond allocation while paying minimal attention to gold.
The safety that bonds once offered, however, is now highly questionable at best if not gone altogether. Sovereign bonds around the world are now yielding zero to negative interest, and with increasingly loose monetary policies accompanied by debasement of fiat currencies and mounting debt, the bond market is only expected to worsen. We simply can’t expect government bonds to keep pace with inflation in this interest rate environment.
Gold shines brightest at 10% allocation
This ties into Milling-Stanley’s separation of gold’s current bull run to that of 2011, as gold began truly gaining traction last year long before the pandemic was even mentioned, being given a massive push by worldwide slicing of interest rates and a subsequent dearth of safe-haven assets.
Whereas most institutions previously held a 1%-2% gold portfolio allocation at most, analysts are now expecting fund managers to increase this allocation to 4%-5%. Milling-Stanley believes institutions could look to increase their portfolio allocation to gold to as high as 10% in what will turn out to be a broad reassessment of hedging. According to State Street’s research, a 10% allocation to gold offers the optimum advantage against inflation risk and market volatility while still showing the greatest returns.
Needless to say, even the more conservative prediction of a +2%-3% increase in institutional gold holdings bodes extremely well for gold prices considering the trillions of dollars of investment capital involved.
While both experts note that vaccine developments have given way to some risk-on sentiment, the latter is expected to remain subdued considering the broader economic picture. Perlaky notes that the global economy has never encountered anything resembling this year’s pandemic, the full effects of which are still to be revealed.
To Milling-Stanley, gold’s pullback from August’s levels represents a healthy correction from what were at the time perhaps overbought levels. This should help the metal better prepare for the next leg of a lengthy bull run that could see it push to $2,300 sometime next year.