Driven by a combination of factors, including increased interest from central banks and investors with a preference for diversification, gold has made a name for itself as a strategic asset in portfolios, according to Robin Tsui, Asia-Pacific gold strategist at State Street Global Advisors.

The commodity has seen a significant rally over the past eight months, reaching a new record high of US$2,531 in August.

Gold has generated double-digit returns of more than 20 percent year-to-date, outperforming most other asset classes, according to the World Gold Council.

Speaking to InvestorDaily, Tsui noted that gold is now trading in line with State Street's bullish case of US$2,500 to US$2,700.

That target range, he explained, was revised in June following strong retail buying from Asian markets and strong central bank interest in the first half of 2024.

"We think there is a structural change in the gold industry led by central banks," he said.

“If you look at the first half of 2024, central banks have consumed nearly 22 percent of annual gold demand. If we look back, say 10 years ago, they consumed about 10 percent.

He continued: "So imagine, all these central banks, they're already consuming so much gold from the supply, and we don't think that demand is going to stop."

The strategist pointed to recent data from the World Gold Council, which found that market volatility and geopolitical uncertainty have pushed gold to a new level of popularity, particularly among central banks.

Surveying 70 of the world's central banks in June, it revealed that almost a quarter of central banks planned to add to their own gold reserves during the year, the highest level seen since the survey began in 2018.

This follows the addition of 1,037 tonnes of gold by central banks in 2023. and a record 1,082 tonnes in 2022.

"We are having more talks with central banks in the Asia-Pacific region," Tsui told InvestorDaily.

"We're getting a lot more inquiries about gold from central banks, that's very much in line with the research done by the World Gold Council, and so I think that's a fundamental structural change."

This represents a very different use case for gold compared to three decades ago, when it was primarily associated with jewelry, he noted.

"[Back then] the jewelery sector actually consumes about 90 percent, but now the sector consumes only about 40 percent. A lot of it goes into investments and central banks," he said.

Addressing underinvestment

Tsui explained that State Street typically advises investors to hold some strategic allocation to gold, around 2-5 percent in a portfolio, as a protective hedge.

However, "many investors are still underinvested," he said.

"Most advisers in Australia feel they should be advising clients to allocate more," he said.

"Australian investors understand what gold is - Australia is a huge commodity market - but there is more discussion around how gold can actually help improve their returns."

According to Tsui, this underinvestment has fueled efforts to improve awareness of the role of gold in portfolios and has led to an increasing number of gold fund launches in the Australian market.

"Globally, based on what we've found, the average distribution is only 2 percent overall, so if all customers increase to 3-5 percent, even 6 percent, that would be a structural change," he said.

As investors seek to diversify their portfolios and hedge against market volatility, gold's low correlation with traditional asset classes such as stocks and bonds can help mitigate portfolio risk, he said, and its historical role as a safe haven for times of economic uncertainty further enhanced its appeal.

Amid escalating tensions in the Middle East, Tsui confirmed that the firm is "definitely" getting questions about the role gold plays against other commodities such as oil, silver and even bitcoin.

"I think essentially clients are becoming more educated about the difference between oil and gold because the driving forces are quite different," he said.

"We've found that oil has historically been a better hedge against inflation, I think that's why we advise clients to have both." You have a strategic allocation to gold as a hedge against market risk, but then you have some sort of allocation to oil and other commodities to provide that inflation hedge."