Gold: Defensive or growth asset?

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The difficulty in working out a fair value given the absence of a cash flow is only one of the challenges that can make it difficult for institutional investors to allocate to gold.

A second challenge is the categorisation of gold as a growth or a defensive asset. This too is understandably difficult for many investors, given the precious metal does not fit neatly into either of these categories.

Some view the metal as part of the broader commodity complex and, therefore, see it predominantly as a growth asset. Others, including the majority of the world's central banks, tend to see gold as a currency, or a form of money.

Viewed through this lens, gold is typically seen as a defensive asset.

Growth asset characteristics

Supporting the argument that gold is a growth asset is the fact that the total return on gold is driven exclusively by capital gains or losses, with returns solely driven by changes in the gold price.

The facts that gold generates no income for most investors (noting there is a robust market for gold leasing among central banks and other financial institutions) and exhibits price volatility similar to equity markets, also support the notion that gold is a growth asset.

Those who believe gold is a growth asset could also point to the fact that gold held in jewellery form accounts for almost half of all the gold that has ever been mined