The festive season is upon us and with it comes the tendency to retrospection, to consider the year’s highs and lows, triumphs and failures. Of course, as we approach the New Year, we are also inevitably drawn to resolve to improve, to do better, to try harder, or at least to avoid those distracting vices that may undermine our good intentions. So, in this spirit, we ask what, as wealth management professionals, we might have learnt from 2012 and what might we choose to change or strive to avoid or overcome as we welcome in 2013?

Twenty twelve was a year of continued uncertainty and widespread lack of confidence in the plans and solutions on offer. The optimism of spring quickly soured as economic data early in the summer caused forecasts across the globe to be revised downward. European woes and fears about the vigour of other advanced economies refuse to be assuaged and the euro area and UK economies now appear in contraction or to have “flat-lined”. This weakness has also seeped into emerging economies and even dampened China’s economic growth. In the US, we have seen growth in fits and starts but, post-election, the “fiscal cliff” still looms and politicians do not seem to be moving towards a consensus any time soon. The failure to do so by the end of this year and the possible debt ceiling breach in spring of 2013 threaten severe consequences, with a further plummet in confidence and a corrosive impact on the value of assets across the globe.

Many seasoned advisors have commented that another victim of these last difficult years has been long-term strategic thinking, with a concurrent rise in short-term tactical investments, at least partly due to an inability to see beyond the current stubborn miasma of doubt. Grasping at immediate opportunity is understandable and offers investors a degree of comfort in the promise of returns, but it may also lead to neglect of the strategic asset allocation decisions necessary to produce more enduring portfolio stability.

If we cast our eyes back to forecasts made in the spring of 2009, we note that the National Institute of Economic and Social Research, issued dire warnings at the time that the UK economy “would not recover until 2012”. We are now well into that predicted period of recovery but it still remains elusive, which should serve as a lesson that long-term capital preservation is not simply a matter of peering round the next corner, in the hope of the next good bout of news and the promise of an upturn in the market. If clearer vision is unobtainable, we should at least be better prepared for the unexpected.

Earlier this year, Christine Lagarde, a few months into her new role as managing director of the IMF and discussing how she thought political cycles were lagging market cycles, commented, “…with the passing of each cycle, we reach a higher and higher level of uncertainty, and the stakes rise. At this point, stability is at stake. Growth is at stake. In the case of Europe, the cycles are now threatening the very existence of the European project.”  This amplification in cyclical trends and destructive downside volatility is a key factor that needs to be recognised by anyone attempting to see beyond the current fog of uncertainty and to plan for a more stable future. There may be many investments that promise substantial opportunities during bursts of market optimism, but there are very few that can allow investors to plot a path through these tumultuous cycles.

Often overlooked

We believe gold has a vitally important but still often overlooked role to play here. Research by the World Cold Council and a range of independent, highly respected economic research agencies has consistently shown the significant contribution that a strategic allocation to gold can make in enhancing portfolio stability. Most recently (in “Gold as a strategic asset for UK investors”, World Gold Council, July 2012), an examination of the performance of balanced sterling-dominated portfolios between January 1987 and December 2011 again showed that a relatively small allocation to gold evidently increased risk-adjusted returns, or reduced potential losses, across multiple market cycles and economic conditions.

This adds to a growing body of work examining gold’s diversification benefits that has also highlighted the advantages it can offer in potentially insulating gold from so-called “tail-risk” events – the occurrence of extreme conditions that have a statistically improbable but often very destructive impact on market returns.

Of course, the festive season is also a time of celebration, and even now, over the longer term, there is much to look forward to – not least the creation of wealth and prosperity where it has long been lacking and, with it, vast numbers of new consumers, new markets and new opportunities.

The most populous nations on earth are those that are also experiencing the greatest economic growth and, regardless of temporary setbacks, this is far too substantial a force to be stymied for long. We would argue this is something to be embraced, not feared, and gold has a role to play here too. This is because, in part, these dynamic and rapidly developing nations, with India and China to the fore, also typically have socio-cultural affinities to gold that are both centuries old but have also flourished and evolved into vibrant new sources of demand as markets have deregulated and matured.

It is perhaps not surprising then that in 2012 we have witnessed two very distinct sets of investors, central banks and family offices, that have been increasingly drawn to gold as an asset because they share at least one thing in common – the desire to preserve the value of their assets across many market cycles and over generations.