Scanning the debris of the recent financial crisis, many key commentators pointed to evidence of a flight to quality and hard lessons that would long endure in the memories of investors. Simplicity and safety have been cited as the new priorities for investors. The devastating wealth erosion inflicted by some of the most savage market conditions seen in the past 100 years was expected to change the investment landscape for the foreseeable future, a change most clearly evident in our revised tolerance for investment risk.
So how much has investor behaviour actually changed? With the second quarter of 2009 dominated by a growing sense the worst of the global recession might be behind us, is there a danger investors will discard their much heralded new-found caution and revert to a focus on driving returns at the expense of adequately protecting their assets?
A recent YouGov poll in the UK suggested that one in five high-net-worth investors lost more than a quarter of their assets in less than two years. We might hope that such a severe shock would have removed any blinkers that caused these investors to pursue strategies that proved vulnerable in the face of a global downturn. In the run up to the crisis, many investors were clearly far too narrow in their focus, investing in assets with drivers which were closely linked.
Some financial professionals suggested the global reach of the crisis left them with nowhere to turn and diversification strategies failed because assets chosen for diversification had, in fact, converged with mainstream assets, all dragged down by the same circumstances.
In practice, however, it was the failure of most fund managers and investment strategists to diversify their asset allocations effectively that rendered portfolios so exposed to the corrosive effects of recession If they had looked hard enough, they might have identified one asset that has been shown, historically and statistically, to consistently mitigate risk and is generally insulated from the corrosive impact of an economic downturn - gold.
When most commodity prices fell in tandem with oil, gold did not respond in the same way. Generally, commodity consumption is heavily linked to industrial usage, meaning commodities tend to fare badly in uncertain economic times when industrial demand and consumer confidence are impacted.
Conversely, the gold price is driven by a much broader range of factors than those which influence other assets. It is the wide diversity of gold demand that has helped protect it from western economic cycles and dampened the volatility inherent in most other commodities.
Gold’s independence from the price drivers of other assets is even more pronounced when viewed in relation to ‘mainstream’ assets such as equities. It has proven to help insulate investors from the ravages commodity markets, second only to oil. The asset can quickly be traded around the clock in larger size and at narrower spreads than many competing diversifiers or mainstream investments.
Investor access to gold is no longer an issue, there are now a range of paths to gold exposure. Gold can be purchased as bullion coins and bars, gold exchange traded funds, mint-backed certificates, or via gold accounts.
Regardless of optimism, or otherwise, regarding the current economic outlook, it is worth remembering that, globally, share markets lost an estimated US$14 trillion during 2008. Any road to full recovery is likely to represent a fairly long and winding one. But, even when we have eventually returned to sunnier market conditions, it is always pays to prepare for stormy weather. This is where gold really shines.