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September 22, 2016



SPONSORED SECTION Regaining its Glitter The role gold can play in institutional portfolios eorge Milling-Stanley, head of gold jewelry consumption because their economies are investment strategy at State Street doing well. China may not be growing at 11.5% anymore, but it?s still China, it is growing a lot faster GGlobal Advisors and one of the than we are in this country, or in Japan or Europe. proponents of SPDR Gold Shares India has started to pick up again, too, as we (GLD), the largest physically-backed gold approach the end of the monsoon season and get exchange-traded fund, re?ects on the drivers closer to the festival season, followed by the wedding of that precious metal?s market and reveals why season. People are starting to buy in anticipation. he finds gold ?endlessly fascinating,? even after On the supply side, there are signi?cant pressures. George Milling-Stanley being in the business since 1972. The average cost of being in the gold mining business Head of Gold Investment Strategy in a sustainable manner is running somewhere in the State Street Global Advisors P&I: How do macroeconomic factors such as supply $1,200 to $1,300 per ounce range, so it?s not far and demand, market volatility, interest rates and below the price. We believe that mine production political uncertainty drive the price of gold? has probably plateaued over the last few years and is likely to move downward unless we get a signi?cant George Milling-Stanley: The gold price is a complex increase in the gold price. then. So I think the dollar has been removed as a mechanism, and many different things can have an problem for gold in 2016, and that has been very, in?uence on it. The most important in?uence is the P&I: How do the dollar and the geopolitical very bene?cial for the price. balance between supply and demand. Then the environment in?uence the price of gold? foreign exchange markets, especially the dollar, Add to that that there are still no signs of in?ation, as well as competing investments, speci?cally the Milling-Stanley: Whenever the dollar strengthens, but if we start to see rising inflation, that would be U.S. equity market, can also be important, as can more often than not you will find gold prices going just another reason for investors to turn to gold. investors? perceptions of risk, both macroeconomic down, and whenever the dollar weakens, you tend Gold has a thousands-of-years-long track record as and geopolitical. to find gold going up. a protection against inflation. P&I: What are some of the current in?uences on However, the markets marked the dollar down to With regard to political uncertainty, we still have supply and demand? a four-month low on the announcement that the the uncertainties around the outcome of the Brexit Fed rate hike in December would be only 25 basis vote. We still have the major problem of ISIS, and Milling-Stanley: China and India show very good points, and the dollar has basically been stable since broader problems in the Middle East, and we have ASSET CLASS RETURNS AND CORRELATIONS RETURNS CORRELATION TO GOLD Trailing Trailing Trailing Trailing Q2 (%) Q2 Correlation Correlation in Q1 Q2 3-Mo. (%) 12-Mo. (%) 6-Mo. 12-Mo. USD 1.65 -2.52 0.69 Weak Moderate Negative -0.01 -0.26 -0.32 10-Yr Treasuries 2.79 7.58 9.27 Moderate Positive Weak Positive 0.45 0.32 0.30 Commodities 15.65 20.02 -15.13 Weak Weak -0.06 -0.07 0.00 Equities 0.26 -0.02 -5.72 Moderate Negative Weak Negative -0.37 -0.31 -0.19 Gold 6.77 24.60 12.79 Source: Bloomberg, SSGA. Past performance is not a guarantee of future results. Indices representing the above asset classes are as follows: Gold = LBMA Afternoon Gold Price as tracked by ICE Benchmark Administration Ltd., USD = The U.S. Dollar Index, 10-Year Treasuries = The ICE U.S. Treasury 7-10 Year Bond Index, Commodities = S&P Goldman Sachs Commodity Index, Equities = MSCI ACWI Index. Investment Insights is published by the P&I Content Solutions Group, a division of Pensions & Investments. The content was not produced by the editors of Pensions & Investments and and does not represent the views of the publication or its parent company, Crain Communications Inc.


SPONSORED SECTION an increasingly acrimonious political situation in this country surrounding the election and a gridlocked Congress. Gold tends to do well amid political and macroeconomic uncertainties. P&I: How long should investors expect these trends to impact the price of gold? Milling-Stanley: I am optimistic on the gold price. We?ve had a good run already this year, with a 30% gain from the low of $1,050 [per ounce] that we reached in December. But I think there?s still the potential for maybe another $50 or even $100 ? I think that would be sustainable given the environment. Investors can be reasonably confident that the trends that we?ve talked about are likely to remain in place and are likely to continue to impact the price of gold for the foreseeable future ? at least a year, maybe two years, maybe longer than that. NEWS P&I: Where is gold in terms of the market cycle? Milling-Stanley: A bear market started in 2011 and BLOOMBERG ran until December of last year, and took us from $1,850 down to $1,050. I think that period has now ended and we are in a new bull market. record as a protection against adverse currency that can deliver decent returns as well as income. movements. How can gold play a role when these are the main I think gold will eventually reach $2,000, I just don?t objectives? know when that is likely to happen. But I think that I feel comfortable with 5% as a strategic allocation we could move up relatively moderately each year in my portfolio, but some research shows that in Milling-Stanley: First of all, gold has proven it can for the foreseeable future. periods of extreme market turbulence, it can be provide yield. It is also possible to use options ?nancially bene?cial to double that allocation. strategies to generate income on gold, for example P&I: Why is gold viewed as a safe haven during by using covered calls in the options market for GLD, times of uncertainty? P&I: Should gold be considered one component in a broader commodities or alternatives strategy? or for large holders of GLD, using the securities lending market to lend for short sales. Milling-Stanley: There is a lot of misunderstanding Or should it be considered a strategy by itself? about that phrase ?safe haven.? Some people think But in a world of negative real interest rates, the that a safe haven means that when other assets go Milling-Stanley: The correlation between gold and search for yield is very much a difficulty. The whole down in value, the safe haven is going to soar. I think commodities is not strong mathematically. There issue is keeping an awful lot of institutional portfolio of a safe haven as something more like an insurance have been times when gold and the commodity managers up at night, and sometimes me as well. policy for the whole portfolio. When other things in complex move together for quite a sustained the portfolio go down, gold holds its value. That?s period of time, but it doesn?t meet my rigorous test the real importance of a safe haven asset. P&I: What?s the best way for an investor to carve for a correlation unless it happens over decades. out an allocation to gold and invest in it? If an investment institution has an allocation to P&I: How should institutional investors think about commodities, it?s going to make sense for that Milling-Stanley: I?ve often said there is no bad way gold? institution to have a separate allocation to gold. to gain exposure to movements in the gold price, Milling-Stanley: A safe haven investment should As far as liquid alternatives are concerned, there but most investors have voted overwhelmingly that not be a short-term investment. Gold should be are an awful lot out there that are not as liquid as the gold ETF is the easiest way to do it. thought of as a long-term safe haven investment. I the gold market. I think gold merits an allocation believe a small strategic allocation to it will improve by itself. I don?t know whether I would consider it It is a very simple, very transparent, very secure way the risk-adjusted returns of any properly balanced a strategy by itself. I would consider it a strategic of investing in gold. I?m not going to knock any of the portfolio. Gold offers a tremendous amount of allocation in and of itself. other ways. There are some people who want the diversification, it reduces the overall volatility of the pleasure of being able to handle their investment. portfolio, it offers a proven element of protection P&I: In today?s environment, most asset owners But for most institutional investors, ETFs are the way against unexpected events, and it has a proven track are struggling to ?nd investments across portfolios to go. v KEY CONTACT SPDR ETFs: Read, print, email and tweet this Q&A to a colleague at Investment Insights is published by the P&I Content Solutions Group, a division of Pensions & Investments. The content was not produced by the editors of Pensions & Investments and and does not represent the views of the publication or its parent company, Crain Communications Inc.

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