Heightened Risks, Alternative Solutions

Mohamed El-Erian on how to invest in a world of ‘unusual uncertainty’

Mohamed El-Erian is chief economic adviser at global insurance giant Allianz and former CEO of PIMCO, the world’s biggest and most influential bond investment firm. Here, El-Erian, dubbed one of the ‘Top 100 global thinkers’, assesses the challenges faced by the global investment community and the valuable role that gold can play in today’s uncertain environment.

Welcome to the autumn edition of Gold Investor. As 2016 draws to a close, macroeconomic and political risks seem more acute than ever.

In the US, the imminent Presidential election is expected to have significant political, financial and economic implications, whatever the outcome. In Asia, questions surround the economic outlook for China, while Japan remains mired in a vicious circle of low growth and deflation. And in Europe, the repercussions of Britain’s unexpected decision to leave the EU, amid increasing nationalist sentiment across the region, are expected to persist for many months.

Against this backdrop, central banks have tried to stimulate growth through ultra-low and even negative interest rates, but their efforts have yielded little joy, prompting many investors to question long-held beliefs about basic investment strategy. Whatever the answer, one point is clear: it is increasingly tough for investors both to manage risk and deliver
acceptable returns. In this edition of Gold Investor, leading opinion formers and financial institutions discuss the global economic climate and the role that gold can play as a risk mitigation and wealth preservation tool, despite short-term price fluctuations.

Mohamed El-Erian, chief economic adviser at global insurer Allianz and former CEO of leading bond investor PIMCO, is acknowledged as one of the top 100 global thinkers. He suggests that we are in unchartered economic and political waters, characterised by exceptionally low interest rates, stagnant growth and rising inequality. In this inhospitable environment, investors are being tempted to take excessive risks to achieve desired returns. El-Erian suggests that a strategic allocation to gold can help to increase returns and mitigate risk.

Simona Gambarini, commodities analyst at leading research consultancy Capital Economics, also believes that gold has a role to play in today’s uncertain world. Acknowledging that the price of gold has, in the past, been linked to the direction of US interest rates, she suggests that this time, the precious metal is likely to remain in demand, even if the Federal Reserve raises rates. First, because nominal US interest rates are expected to remain low. Second, because other central banks are unlikely to follow the Fed and third because the political environment remains highly unpredictable.

On this note, Dr Martin Murenbeeld, chief economist at respected economic and gold consultancy Dundee Economics, discusses the alarming dangers posed by global trade imbalances. He believes these can only be rectified by significant exchange rate realignments, including a devaluation of the dollar. As he explains, this will have a substantial effect on the price of gold.

Mitsubishi UFJ Trust and Banking Corporation, one of Japan’s leading trust banks, reflects on gold’s value in today’s climate too. Executive Officer Osamu Hoshi highlights the rising appeal of gold to Japanese financial institutions and pension funds, as investors seek out assets that provide comparative stability in a volatile climate.

In terms of key new initiatives, Dr Hamed Hassan Merah, Secretary General of the Accounting and Auditing Organisation for Islamic Financial Institutions, introduces the Shari’ah standard for gold, developed in collaboration with the World Gold Council, and explains the benefits it will bring to Islamic investors around the world.

And Garry Jones, CEO of the London Metal Exchange explains the rationale behind LMEprecious, the new initiative launched in partnership with the World Gold Council and leading industry participants. A suite of exchange-traded and centrally cleared precious metals products, LMEprecious is intended to modernise the London gold market and deliver tangible benefits to market users.

We are keen to hear your views about our publication so please email goldinvestor@gold.org. We hope you enjoy the read.

Aram Shishmanian  — Chief Executive Officer World Gold Council

The World Gold Council is the market development organisation for the gold industry. Working with world-class organisations across the supply chain, we stimulate demand, develop innovative uses of gold and take new products to market. As the global authority on gold, we offer comprehensive analysis of the industry, giving decision makers unparalleled information and insight into the drivers of gold demand.

‘GoldSafe provides regular commentary and analysis of gold, currencies and the global economy.  All articles published here are to inform, not influence.  Only you can decide the best place for your money, and any decision you make or don’t may put your money at risk.  GoldSafe’s fundamental strategy requires the ownership of physical gold and does not recommend gold derivatives, ETFs or any paper substitute.’