Less Liquid Assets Are Investors' Preference: Gold Is Gaining Strength

Reduction in fixed income, growth for portfolio in alternatives

A recent report by the World Gold Council (WGC) on investment update, "Portfolio composition has changed in response to the low rate environment. Investors have moved further out on the credit curve, building high yield exposure and long-term Treasury positions in their search for yield. And, although fixed-income allocations remain significant, they are declining." This has gradually helped the alternative investment opportunities to grow. According to data by Greenwich Coalition and Mercer, along with this reduction in fixed income, investments in alternatives including private markets, real assets, and infrastructure, have augmented. The report also suggests, "Investors are targeting a 3rd of their portfolio in alternatives and other assets over the coming 3 years."

The volatility of gold and other alternative investments

Many alternative investments options are not as liquid as exchange-traded investments or equities. They are likely to hold a larger portion of investors' portfolios. Gold is less volatile than nearly all alternative investments and on par or less volatile with global equities - in the last 5 years, according to available data published by the WGC. In the same period, Bitcoin has been the most volatile asset among all alternative investments.

The WGC report has mentioned, "Gold can provide the capital and liquidity needed during a market sell-off to counterbalance the effect of portfolios with larger exposures to less liquid assets. Gold trades between more than US$100 bn per day in total, of which approximately US$60 bn are traded in listed exchanges, whether in the form of spot contracts, gold futures or gold ETFs." Gold has been considered as a portfolio diversifier for a long time, and as a hedge to deliver long-term good returns.

Economic crisis and gold market

After the Global Financial Crisis (GFC), institutional investors often asked hedge fund and private equity managers about the time it takes you to exit all their positions - a report said. Investors are generally concerned about counterparty risk and the ability to quickly exit illiquid positions. It becomes important for the theme at a time when they require additional capital. The above-mentioned WGC report stated, this remains a concern today: 42% of investors surveyed by Greenwich ranked liquidity concerns as one of their top 3 drivers of long-term allocation decisions.

However, in the recent period, the gold market has seen a major boom due to the pandemic and inflation concerns. So, the investors' increased risk appetite, coupled with inflationary concerns have helped the gold business to augment globally, faster than ever before. Gold rates have gained to historically high levels, during the Covid pandemic, yet the demand for gold ETFs and physical gold has increased.