Wealth Management and Private Banking

10 June 2021

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Expert: George Milling-Stanley, Chief Gold Strategist, State Street Global Advisors, Facilitator: Caroline Burkart, Aon Client Insight


I first wrote about gold in 1972. It’s now coming up to 50 years since Richard Nixon closed the gold window – the ability for investors to exchange their gold assets for dollars directly. This essentially ended the link between gold and currencies. Prior to this time, gold was essentially money, there was of course the gold standard where currencies needed to be backed 1:1 with stores of gold. The direct relationship between gold and money was severed by Nixon 50y ago.

This created a free market for gold and over the past 50y, gold has delivered capital appreciation equivalent to 8% per year. In 2021 it has not delivered on its potential, but gold performs a 2-fold function; reduces risk and enhances return.Very interested to hear what attracts you to gold, and what turns you off.

Macro outlook – lots of focus on IRs, especially at the long end. Hard to believe we really understand the relationship between gold and interest rates. Does monetary tightening marry with a falling price of gold – no, not really. This tells us that there is a great deal that drives the price of gold – it’s not just an IR response.

Commodity cycles and gold demand – many different drives of price and whatever is dominant, changes all the time and at different times.
Looking at supply and demand fundamentals – China was the first country to suffer from COVID and the first to respond – as such the E markets are coming out of the crisis, far faster than the western world. With this comes more buying of gold, demand for gold jewellery is through the roof. Supply of course was disruptive, but not so much in the case of gold.

Market sentiment – since 2008, investors have been unable to rely on FI to hedge against equity weakness. So, Gold has stepped in to do some of the things that gold was there to do.

Biden administration is planning to reboot the economy, major reform of healthcare and a major reform of climate change – coming against the covid backdrop, this will likely lead to higher debt, $ depreciation, deflation – Gold has responded favourably when there has been sustained weakening of the USD. Any dollar softening could be good for the gold price.

Q & A Discussion:

1. Gold performance is often explained in terms of real yields, but currently its correlated to US treasury yields.

Agree absolutely with this, certainly in 2021, not necessarily since COVID. Investors always want something to hang their hats on. Excessive focus on these treasury rates in my view – not sure this will become a correlation.

China has been building gold reserves for the last 20y, doing so quite quietly. China doesn’t like the USD. The see the USD as the dominant currency, so Chinese are taking the long view that at some point they will see significant USD depreciation so they want to own other assets -2/3 of its assets are in USD denominated assets. They are trying to emulate other western economies.

2. Chinese don’t seem to like the idea of a stronger RMB, yet we are talking about USD weakening and RMB becoming more dominant – how do we square that circle.

This reflects ambivalence amongst policy makers in China – they do like it strengthening when it symbolises China, but not when it impacts exports. Flip flopping between what they want their currency to do – not convinced the Chinese have even squared that circle.

3. So how do we trade this then? Presumably you will say to buy gold?

At this stage I would not be investing in RMB, but the notion of buying gold is probably not a bad idea. A good mix of asset argument at a minimum could be made with gold in a portfolio.

60/40 portfolios – time to stop talking about them and to look at proper globally diverse ones. Even a 2% allocation to gold will reduce risk and increase returns. Up this to a 10% allocation and it was an optimal gold allocation.

4. How often do you change your gold allocation?

Used to be a gold trader, but not a very good one. Personally, I bought a handful of gold coins back in the 70s and dabble on a quarterly basis since. I have a strategic allocation of about 5%. I have also gone all in on my 15% allocation in 2019 and am happy with that allocation now. But you can never get it right. But I won’t be reducing my allocation at the current levels. I do however have a trailing stop loss at $1600. 

5. Any view on silver?

Lots of misunderstanding about silver in the US, less so in Europe. The two metals are extremely different though and are driven by very different factors. Silver is a much more industrial metal vs Gold. There are of course odd speculative flurries, but silvers fortunes are governed much more by GDP growth, due to its industrial nature.