The first half of 2014 has delivered good news for the gold sector, the World Gold Council (WGC) revealed last week, reporting that the price of the yellow metal had risen 9.2% and outperformed almost all other asset classes, bar grains, nickel and palladium, Indian stocks and real estate investment trusts during the period.

“So far, so good. Prices are up, volatility is down and gold has defied the bearish outlook that many gold analysts trumpeted at the beginning of 2014. “Early indicators suggest that consumer demand remains resilient, even after a record year in 2013,” the council said in a market commentary report.

Central bank net purchases of gold also picked up over the six months, adding around 180 t to official reserves between January and May, while jewellery demand had its best first quarter since 2005.

While investment demand in some sectors had, in fact, been tepid, the WGC noted that interest in gold was gaining momentum.

“Net long positions in the futures market have gradually increased as short positions have been covered, exchange-traded funds have experienced inflows in recent months, and coin sales are increasing,” it stated.

Good Business Case
The council added that, faced with low interest rates, investors continued to look for better returns across multiple asset classes and, besides various equity markets, higher-yielding bonds had been a sought-after component in investor portfolios.

As a consequence, credit spreads had tightened to precrisis levels and overall market volatility had reached multiyear lows.

The WGC considered these two factors as supporting the case for investing in gold, as an excess of lower-quality bonds and other fixed income assets increased risk in the financial system and the likelihood of a market correction.

“Volatility appears too low to us and may create an opportunity for investors to buy portfolio protection as a means of prudent and long-term risk management. “
Looking forward, we believe investors can benefit by adding gold as a hedge in their portfolios,” it maintained.

Moreover, low price volatility suggested that “now is the time” to secure portfolio protection through buying gold.

According to the WGC, the main drivers of this low-volatility environment had been tighter credit spreads and higher profit margins – the end result of an extended period of easy monetary policies and looser credit conditions.

“In our view, gold can provide much of the same protection as volatility-based vehicles, with the added benefit that gold investment vehicles are usually cheaper, more liquid, accessible, transparent and without credit.

“Gold also helps reduce long-term portfolio volatility by acting as a diversifier and can help increase risk-adjusted returns. Some investors may see the current low-volatility environment as an opportunity to add gold; we consider that, in addition, gold should be seen as a strategic portfolio component,” the council noted.

Last week

, gold slid 2.4%, its biggest one-day drop since early December, as fears over Portugal’s banking sector subsided and a gain in US equities prompted investors to take profits after the yellow metal’s rally to three-and-a-half-month highs last week.