Gold as a go-to for risk management

Amid overall weakness in industrial commodities, all that glitters is gold. Gold prices surged in recent weeks as fears of a global slowdown persisted.

Gold’s annual average price last year was US$1,268 per ounce, and is forecasted at US$1,400 for 2019, according to Toronto-based Bank of Nova Scotia’s global outlook for the fourth quarter. Gold could shine even brighter in 2020, with prices forecasted to average US$1,550 per ounce, up from US$1,350 per ounce in Scotiabank’s previous outlook.

Gold’s resurgence can be attributed to rising geopolitical risk, which boosts demand for safe-haven assets, and looser monetary policy, which reduces the opportunity cost of holding non-yielding bullion.

“While base metals, most notably copper, have waned amidst weak investment and a sluggish Chinese economy, precious metals like gold have traded at their strongest levels since the eurozone crisis as investors retreat into haven assets and central banks’ prior tightening paths give way to renewed interest rate cuts,” Scotiabank’s outlook said.

Gold’s resilience amid climate risk

As macroeconomic factors help push investors toward gold, they might also want to consider how the precious metal fares on climate risk.

A report released today by U.K.-based World Gold Council examined how gold’s role as an investment could potentially be affected by climate-related risks, compared to other investments. (The council acts as the gold industry’s market development organization, and the report was produced with technical support from independent sustainability consultancy Anthesis.)

The council has refined its emissions estimates associated with gold’s production and consumption, which totalled about 126 million tonnes of carbon dioxide equivalent. That figure was 124 million tonnes in 2018. The newer figure comprises all aspects of production and consumption, whereas the older one focused on production only.

The primary source of emissions was found to be energy use in gold production. To move the needle on those emissions, the report outlined suggestions to transition toward net-zero practically and cost-effectively. These included sourcing renewable electricity and upgrading to energy-efficient technologies.

Several companies’ attempts at such innovation were described in the report. For example, Agnico Eagle, headquartered in Toronto, is working with local experts in Nunavut to build alternative energy sources — specifically, hydroelectric transmission and fibre-optic infrastructure.

The report also considered gold’s risk-return profile and portfolio performance relative to other assets in the context of climate-related risks. It found that gold’s performance was “relatively robust” across various climate scenarios of increasing global temperatures, in part due to its role as a safe-haven market insurance.

That bodes well for gold, as does increased market volatility, the report concluded: “Gold’s roles as a risk hedge, portfolio diversifier and market insurance asset are well documented; heightened market volatility and uncertainty from climate-related risks should therefore be supportive of gold.”

For full details, read the reports from Scotiabank and the World Gold Council.