JOHANNESBURG (miningweekly.com) - New ways to access the gold market, such as physical gold-backed exchange-traded funds (ETFs), have resulted in the investment demand for gold growing 18% each year since 2001, indicating that the precious metal has now become more mainstream, the World Gold Council (WGC) said in its latest report.

Released on Tuesday, the report titled 'The relevance of gold as a strategic asset', further highlighted that the expansion of the middle class in Asia, and a renewed focus on effective risk management following the 2008/9 financial crisis in the US and Europe, were also changing the face of investors, which now ranged from individuals to pension and sovereign wealth funds, located in developed as well as in emerging markets.

"Today, gold is more relevant than ever for institutional investors. While central banks in developed markets are starting to normalise monetary policies - leading to higher interest rates - we believe the effect of quantitative easing and the prolonged period of low interest rates can have a long-term effect.

"These policies may have fundamentally altered what it means to manage portfolio risk and could extend the time needed to meet investment objectives, the WGC outlined.

In response, institutional investors have embraced alternatives to traditional assets such as stocks and bonds. The share of nontraditional assets among US pension funds has increased from 17% in 2006 to 27% in 2016.

The WGC explained that many investors were drawn to gold's role as a diversifier - owing to its low correlation to most mainstream assets - and as a hedge against systemic risk and strong stock market pullbacks.

Some use it as a store of wealth and as an inflation and currency hedge.

As a strategic asset, gold has historically improved the risk-adjusted returns of portfolios, providing returns while reducing losses and providing liquidity to meet liabilities in times of market stress.

Gold's long-term returns have been comparable to stocks and higher than bonds or commodities.

"There is a good reason behind gold's price performance: it trades in a large and liquid market, yet it is scarce," said the WGC.

The gold market held two attractive features for investors: scarcity supported its long-term appeal, but the size of the market was large enough to make it relevant for a variety of institutional investors - including central banks.

"We estimate that there are about 190 000 t of gold above ground worth more than $7.6-trillion. Mine production adds around 2 900 t/y, equivalent to a 1.6% increment.

The estimated breakdown of physical gold based on its use is jewellery - 89 600 t, valued at $3.6-trillion and making up 47%; the official sector, using 31 600 t, valued at $1.3-trillion; and bars and coins, using 38 400 t and valued at $1.5-trillion, making up 20%.

ETFs and similar accounts used 1% or 2 300 t, valued at $98-billion, while 15% was used for other reasons or unaccounted. This amount to around 27 700 t, valued at $1-trillion.

In the long term, the expansion of wealth has a positive effect on demand for gold jewellery, technology and, to some extent, bar and coin demand - the latter in the form of long-term savings.

"Investment demand can, over the short- and medium-term, also strongly influence gold's performance. This type of demand, from the physical (and physically backed) markets to exchange-traded derivatives and over-the-counter products, increases during periods of economic and political uncertainty and falls as investor confidence grows," said the WGC.

Further, it noted that drivers of the gold price came down to opportunity cost; economic growth and market uncertainty; tactical flows and price momentum and other internal gold market dynamics, including, for example, seasonal consumption and mine production.