(Kitco News) - Increased volatility in equity markets and geopolitical uncertainty are expected to drive investors back into the gold market this year, said one analyst.
In an interview with Kitco News, David Mazza, head of research at SPDR ETFs and SSGA Funds, said that he is already starting to see investors take more interest in gold and SPDR Gold Shares physically-backed exchange-traded fund (NYSE: GLD). He added that investors are using the yellow metal to create “defensive” positions in their investment portfolios.
Looking at the gold EFT market, Mazza said in February, GLD saw monthly net investment inflows for the first time since December 2012; he added the inflows carried into March.
According to the company’s historical data, on March 24, SPDR Gold Shares held 821.47 metric tons of the yellow metal in its trust, the highest level since Dec. 13. However, since then the volume of gold has dropped; as of April 15, SPDR held to 806.82 tons of gold in trust, still up from the start of the year when the trust had 794.62 tons of gold.
“Year-to-date we have seen $400 million of net new inflows into GLD,” he said. “But if we simply look at just asset classes, gold has done remarkably well both against traditional fixed income and the equity markets.”
In 2013, gold was unable to compete with an equity rally that was showing consistent gains; however, with equities at significant levels, Mazza said he now starting to see stronger volatility, making gold a more attractive investment.
In a recent report, Mazza looked at gold’s performance during times of increased volatility, either the result of internal market forces like the dot.com bubble and geopolitical events like 9/11.
“What we found is that gold tends to perform well in these scenarios because its supply and demand characteristics are very diverse,” he said. “Even if you don’t expect there to be a major market-moving event, with gold, you get the benefits of an uncorrelated asset.”
The report also said that, as of December 12 gold represented about 1% of total global assets; Mazza added that with increased risk sentiment in the marketplace, they are expecting to see gold investments expand its role “as a strategic long-term asset.”
“With the myriad of risks in today’s complex global market, extending gold’s traditional tactical portfolio role to a consistent strategic allocation affords a range of potential protection,” Mazza said in his report.
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Some analysts have pointed out that gold’s role as a safe-haven has diminishing as the outlook for global growth remains positive. However, Mazza said even in a benign growth environment gold still has a role to play. For 2014, he said he is expecting to see steady global growth, but the improved outlook won’t be without its risks.
Recent tensions in Ukraine, between Western nations and Russia, have maintained a strong fear sentiment in the marketplace but that is not the only difficultly investors could face this year.
Mazza pointed out that this year there will be a total of 40 elections globally, with 27 in emerging market countries. Iraq, India, Afghanistan, Brazil, Ukraine and Egypt are all hold elections this year, which Mazza said have the potential to create more market instability.
“Gold can be a really nice ballast when balancing those different sides of the risk spectrum,” he said.
By Neils Christensen of Kitco News; nchristensen@kitco.com
