Gold, in Australian dollars (AUD), delivered positive returns in 2022 and this has continued so far in 2023. It has attracted attention: not only have global central banks continued to buy gold, but Australia’s sovereign wealth fund has also added gold to its portfolio.
Looking further into 2023, most assets may see headwinds as stagflationary pressures intensify; our analysis, based on historical data, shows:
gold has historically posted superior returns during stagflationary periods
gold can improve the risk-adjusted return of a portfolio comprising of asset classes traditionally held by Self-Managed Super funds (SMSF).
Following a staggering 2022, gold in AUD has continued to outperform major assets this year (Chart 1). While most assets plunged last year amid high inflation and rising rates, gold delivered a 7% return.1 So far in 2023, gold has been spurred on (+7%) by intensifying expectations that major central banks will end their monetary tightening cycle, as well as by fears of a potential recession ahead.2 As noted in our 2023 Mid-year Outlook, gold may remain well supported in H2 as yields could remain relatively stable and the dollar might weaken. And should global economic conditions deteriorate, gold may experience stronger safe-haven demand during the second half.
Annual returns on major assets in Australian dollars (%)*
Sources: Bloomberg, World Gold Council; Disclaimer
*As of 31 December 2022. 2023 Y-t-d refers to 30 June 2023. Based on LBMA Gold Price PM, AusBond Bank Bill Index, AusBond 0+ Composite Index, Bloomberg Barclay Global Agg, ASX300 Index, MSCI World Index, ASX300 A-REIT Index, FTSE EPRA/NAREIT Developed ex-Australia Index, FTSE Developed Core Infrastructure Index. All calculations are in AUD.
Gold’s strength has been attracting attention. Central banks remained committed buyers in Q1 2023, adding 228t to global reserves after a record level of annual buying in 2022 (1,078t). Even though their buying spree could slow, we expect global central banks to remain net gold purchasers in 2023. And as our 2023 Central Bank Survey shows, over the next 12 months, 24% of central banks expect their gold reserves to increase whilst 71% believe global gold reserves will rise.
In its most recent position paper, the Future Fund, Australia’s sovereign wealth fund, announced the addition of gold to its portfolio. Their paper indicates that challenges such as high inflation and the weakened defensive nature of foreign currencies may have prompted its decision to buy gold – risks that are also found within an SMSF (Table 1).
| Portfolio implications | More alpha | More volatility | More granular | More correlation caution | More domestic exposures | More defensive levers, inflation protection |
| Levers activated | More private equity | Focus on liquidity and dynamic asset allocation | Detailed levers for DM/EM | Broader currency basket | Added to infrastructure | Added gold, commodities, tangibles, alternatives |
Source: The Future Fund, Position Paper – The death of traditional portfolio construction?, December 2022
Markets may be vulnerable to negative shocks for the remainder of the year – most notably stagflation (Chart 2). This is a key concern shared by the Future Fund, highlighting that we may face an environment where inflation remains elevated and growth slows over the coming years. This scenario could be amplified by factors such as geopolitical conflicts.
“In this kind of environment there is a real risk of simultaneous slow growth, high unemployment and rising prices…”
– The Future Fund, Position Paper – The death of traditional portfolio construction?, December 2022
In Q1 2023, Australia’s quarterly consumer price index (CPI) rose to 7% y/y (Chart 2); well above the target range of 2 to 3% and topping economists’ consensus expectation of 6.9%. As the Reserve Bank of Australia (RBA) noted in its June meeting, when it surprised investors with another 25bps hike, upside risks to the inflation outlook has increased and it might be difficult to achieve a soft landing for the local economy.
In the meantime, the future growth projection for 2023 has been dialled down further, from 1.8% to 1.5% according to Bloomberg’s economic forecasts in January and June.
Sources: Australian Bureau of Statistics, Bloomberg, World Gold Council; Disclaimer
*As of 31 March 2023.
Cross-asset implications
Elevated inflation can, broadly speaking, create significant issues for investors. For instance, the correlation between bonds and equities – two asset classes that represent a large proportion of many SMSFs – tends to rise during high-inflationary periods. Gold, on the other hand, remains an effective diversifier as inflation rises (Chart 3).
Correlation patterns of bonds and equities, gold and equities at different inflation levels*
Sources: Bloomberg, World Gold Council; Disclaimer
*Note: Based on monthly data of MSCI World Index, Bloomberg Global Treasury Index (AUD hedged) and LBMA Gold Price between 1990 and 2021. All calculations in AUD.
In fact, gold has long been considered a hedge against inflation, and historical data confirms this (Chart 4). Also, the annualised return of 7.6% in AUD over the past 20 years has outpaced CPI both in Australia and globally.3
Major asset returns in AUD during high and low inflation environments*
Sources: Bloomberg, World Gold Council; Disclaimer
*Based on Australian quarterly CPI, AusBond 0+ Composite Index, Bloomberg Barclay Global Agg, ASX300 Index, ASX300 A-REIT Index and MSCI World Index between Q4 1992 and Q1 2023. All calculations in AUD.
Stagflationary pressures pose challenges for all investor portfolios. Stagflation can severely disrupt financial markets and hamper the performance of major assets. But historical data shows that gold, a safe-haven asset, has benefited investors with attractive returns during such periods (Chart 5).
Major asset returns in AUD during different economic scenarios*
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer
*Data between Q1 1973 and Q1 2023. ASX300, AusBond, Global bond and Global stocks only date back to the 1990s. All calculations in AUD. Based on quarterly data of Australian GDP, CPI, LBMA Gold Price PM, AusBond 0+ Composite Index, Bloomberg Barclay Global Agg, ASX300 Index, MSCI World Index and Bloomberg Commodity Index.
Our analysis shows that a portfolio comprising assets typically held by SMSFs (Chart 6) would have achieved higher risk-adjusted returns and lower drawdowns with an allocation to gold (Chart 7).
Asset allocation comprising assets typically held by SMSFs
Sources: World Gold Council; Disclaimer
*As of 31 December 2022.
Moreover, investment performance over the past 3, 5, 10 and 20 years emphasises gold’s positive impact across various investment horizons (Table 2).
Gold’s stability and defensiveness, among its other qualities, have caught investors’ attention supported by its strong performance.
Risk-adjusted returns of a hypothetical portfolio with and without gold
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer
*Based on AUD performance between 31 December 2002 and 31 December 2022.
This year we anticipate elevated inflation and an economic slowdown, key ingredients of stagflation. This could severely disrupt financial markets and hurt investors’ portfolios. Examining past data we find that not only can gold remain an effective equity-risk diversifier when inflation is elevated, it also posts superior performance in a stagflationary environment.
Gold is often viewed as a safe-haven asset, or even an investment portfolio insurance policy. But historic data shows that its performance during both stable and volatile conditions is highly competitive compared to other popular assets held by SMSFs.
Comparison of an average hypothetical SMSF and an equivalent portfolio with 5% gold over the past 3, 5, 10 and 20 years based on AUD returns
| 3-year | 5-year | 10-year | 20-year | |||||
| No gold | 5% gold | No gold | 5% gold | No gold | 5% gold | No gold | 5% gold | |
| Annualised returns | 2.6% | 3.0% | 4.6% | 5.0% | 6.3% | 6.4% | 6.4% | 6.5% |
| Annualised volatility | 15.0% | 14.0% | 12.3% | 11.5% | 10.2% | 9.6% | 9.6% | 9.0% |
| Reward to risk | 17.4% | 21.6% | 37.4% | 43.6% | 62.2% | 66.7% | 66.2% | 72.9% |
| Maximum drawdown | -20.3% | -18.6% | -20.3% | -18.6% | -20.3% | -18.6% | -38.1% | -34.4% |
*As of 31 December 2022.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
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