Investors are embracing gold in 2020 as they seek to hedge their portfolios against the volatility created by the COVID-19 pandemic, according to a midyear outlook on the commodity.

The new outlook from the World Gold Council evaluates how gold is doing as expectations of a faster, or V-shaped, recovery are shifting toward a slower, U-shaped recovery. Even under a potential W-shaped recovery, comprising setbacks from new waves of infection, investors are reinforcing gold's role as a strategic asset, the group said in the July 14 analysis.

Juan Carlos Artigas, head of research at the World Gold Council, said in an interview that four primary factors drive gold demand. Those are economic expansion, risk and uncertainty, opportunity cost and momentum. The last three elements are supporting investment in gold for the remainder of 2020.

That should offset the temporary loss of demand for gold in the jewelry and technology sector, Artigas added.

"The recovery in the stock market has been quicker and swifter than in previous recessionary periods," Artigas said. "I think this kind of raises a risk, because unless the fundamentals catch up — if they do, then that's great — but if the fundamentals do not catch up, investors may be in for a period of turmoil that will last a little bit longer."

Gold significantly outperformed all other major asset classes in the first half of the year, the report stated. By the end of June, the London bullion market gold price was trading close to US$1,770/oz, a level not seen since 2012. S&P Global Ratings recently increased its gold price assumption for the rest of 2020 to US$1,650/oz due to a robust near-term outlook for the precious metal. Prices are showing no sign of reverting from a positive year-to-date trend, the rating agency said.

"Our price assumptions for the rest of this year and thereafter are conservative relative to prevailing prices (which have traded close to or above US$1,700/oz since April 2020)," Ratings wrote in a July 1 update. "However, we are in a period of significant volatility—both in commodities (particularly oil) and financial markets globally, and that volatility influences gold prices. In addition, gold has historically exhibited an inverse correlation with the U.S. dollar, but both remain relatively strong. In our view, a stronger-than-expected economic rebound could temper the outlook for gold."

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While equity markets rebounded from the initial shock seen in the early days of the pandemic, many investors flocked to gold due to the high level of uncertainty remaining in the broader market.

"Like money market and high-quality bond funds, gold benefited from investors' need to reduce risk, with the recognition of gold as a hedge further underscored by the record inflows seen in gold-backed ETFs," the World Gold Council said in its report.

Central banks around the world are "aggressively" cutting rates and expanding asset purchasing programs in a bid to stimulate the economy, the report noted. That is having unintended consequences on investments. In addition to the increased chance of pullbacks in equity valuations not backed by fundamentals, investors face rising corporate bond prices and limited upside for short-term and high-quality bonds.

Investors often use bonds to hedge their investment portfolios, Artigas noted, but rates are so low that the upside of bonds is becoming more limited.

"Going forward, we do not believe investors will achieve the same bond returns they have seen over the past few decades," the report stated. "Our analysis suggests that investors may see an average compounded annual return of less than 2% (±1%) in U.S. bonds over the next decade."

Gold can be a valuable tool for diversifying against the risks created by the pandemic, the organization said. Historically, the commodity has proven particularly valuable as a hedge against extreme inflation, the World Gold Council said. It also noted that new research shows that gold can also do well in periods of deflation.

"[W]idespread fiscal stimuli and ballooning government debt levels are raising concerns about a long-term run-up of inflation, or significant erosion of the value of fiat currencies," the report stated. "Deflation, however, is seen as the more likely risk in the near term."