State Street Global Advisors’ ‘Godfather of Gold’ says 10% allocation offers investors the best Sharpe ratio
Gold went on a hot run last year. The price went up 18.83% as investors stressed about the lengthy bull market, trade wars and recessionary fears. Bullion is at it again in 2020, up more than 2% on what one leading gold strategist called a period of “unprecedented uncertainty”.
George Milling-Stanley, chief gold strategist at State Street Global Advisors, has more than 40 years in the business, and has even been dubbed “The Godfather of Gold”. State Street’s two gold ETFs, its flagship SPDR Gold Shares (GLD) and SPDR Gold MiniShares (GLDM), manage more than $45 billion in assets with a 15-year track record.
The Iran-US situation spiked interest in gold as investors reacted but despite that situation calming down – at least from a US perspective – Milling Stanley said there is good reason for investors to consider the asset class given persistent macro-economic and geopolitical clouds.
He would not be surprised if gold enjoyed a repeat of last year’s 18% price increase and puts the top-end trading range at about $1,650 per ounce, which he admitted could be a conservative forecast. Gold was priced at about $1,558 on Tuesday, shedding 1% in volatile trading as investors booked profits after a two-week high early in the session. Losses, however, were limited by a slide in equities due to worries about a virus outbreak in China.
From a macro-economic perspective, Milling-Stanley told WP the fact equities have gone up for 10 straight years has been great. However, on the flip side, he said this is also why he wakes up staring a hole in the ceiling at three in the morning, wondering how he’s going to replace those kinds of returns over the next decade.
He does not believe this will be possible in the US equity market and says this, and the length of the bull market, is weighing on investors.
“People are increasingly aware that we have just completed the first decade in the history of the United States that did not have a recession in it. That’s wonderful news but it's also rather alarming, because it’s hard to believe that we can go another 10 years without a recession. That does not bode well for equity prices.”
Milling-Stanley added that everywhere you looked in the fixed-income market, there were historically low interest rates or even negative rates. He pointed out that we’re at about $15 trillion worth of bonds in issue with negative rates and, if you looked at real rates, a Bloomberg estimate recently put that north of $25 trillion.
He explained: “There are a lot of problems on the financial markets that make people worried. Many people want to own a safe haven and many look to strategic asset classes [like gold] that they maybe haven't considered before but that have actually performed quite well.”
Beyond Iran, geopolitical issues abound. The US is still locked into Afghanistan, Iraq and Syria. Then there’s President Donald Trump’s goading of North Korea and the ongoing trade wars.
Despite a phase one agreement, there remain a lot of recently imposed tariffs and issues with China, Europe and even Latin America. Throw in a US election year, the impeachment process and Brexit and there is no wonder some investors are retreating.
So how much gold exposure is right for your portfolio? That depends, of course, on the individual, their risk tolerances and liquidity needs.
Milling-Stanley explained: “We have found that within the context of a properly balanced global multi-asset portfolio, an allocation to gold somewhere between 2-10% makes sense. In fact, what we found was that 10% offered the best Sharpe ratio.
“The biggest reduction in risk, and the biggest increase in returns over the past 15 years or so, has been at that 10% allocation level and, increasingly, investors that I'm talking to, both institutions and individuals, are moving towards that 10% level. Some of them are even going beyond that on the basis we are in extraordinary circumstances.”
He added: “Whether your concern is macro-economic or geopolitical in nature, things like inflation, wars, pestilence, or even things like impeachment, gold has offered some kind of protection and we're finding consistently that an allocation up to 10% can actually improve the Sharpe ratio of a properly balanced portfolio. That's got to be good news for investors.”
Bobby Eng, head of SPDR ETFs Canada at State Street Global Advisors, said that the provider’s suite of gold products in 2019 made up more than 80% of the gold ETF flows, leaving them in good shape for 2020 and well positioned to offer investors substantial liquidity.
He said: “Looking at 2019, we had $8.6 trillion of trading volume, which is an astronomical number and more than BlackRock and Vanguard combined, and those are our two leading competitors. If you look at equity and you look at commodity, we have the most active suite of products and if you look at fixed income we have the second most active. So, we’re very well positioned in the ETF ecosystem.”