Business School Professor: Gold and Silver Will Be Important Portfolio Diversifiers

Business school professor Greg Harmon says investors should consider gold and silver as portfolio diversifiers in 2023.

Gold and silver were among the best-performing assets in 2022. As Wall Street suffered through its worst year since 2008, gold eked out a small gain on the year.

In an interview with Kitco News, Harmon said he is bullish on gold in 2023.

Harmon is a professor of banking and finance at Case Western Reserve University’s business school.

Harmon said that the technicals for gold have been bullish since the price bounced off its low of $1,618 back in early November. He also said he expects market volatility to continue to support gold’s safe-haven appeal.

While volatility in the stock market and bond market was extremely high in 2022, World Gold Council analysis shows gold’s volatility remained relatively low.

The confluence of opposing forces not only took gold to a small gain in 2022, but allowed its volatility to remain close to its long-term average of c.16% – while a 60/40 equity-bond portfolio experienced one of its most volatile years.”

Harmon is particularly bearish on the bond market. He said markets are on the cusp of a “paradigm shift.”

The one thing that continues to stand out for me is that we have been a bull market for bonds for 35 years. It really felt to me that 2022 changed that; we are seeing a secular change in bonds. We don’t know the implication of this shift because everybody that is investing right now has only lived in an environment where bond prices go up.”

Harmon also warned that we’re starting to see traditional correlations in the markets break down. He said gold is particularly attractive in this environment.

As the World Gold Council analysis shows, gold is typically not strongly correlated with stocks and bonds. That remained the case in 2022.

Although gold’s correlation to a 60/40 portfolio was higher than its average (2.1) – along with the correlation between equities and bonds – it remained low at 20, an indicator of gold’s characteristic as a consistently reliable diversifier during market turmoil.”

Harmon said gold will be an “attractive asset” in this unknown environment where portfolio diversification is crucial.

If you don’t know how things will be correlated, then maybe you need to spread your money out.”

In a nutshell, you don’t want all of your eggs in one basket.

Diversification has always been a crucial investment strategy. The World Gold Council makes the case that gold makes the ideal portfolio diversifier.

Many assets become increasingly correlated as market uncertainty rises and volatility is more pronounced, driven in part by risk-on/risk-off investment decisions. As a result, many so-called diversifiers fail to protect portfolios when investors need them most.  Gold is different in that its negative correlation to equities and other risk assets generally increases as these assets sell off.”

Harmon said a portfolio should have at least 1 to 2 percent allocated to gold. Most investors don’t own any. Peter Schiff recommends at least 10% exposure to precious metals.

Harmon is also bullish on silver, which has rallied significantly off its 2-year lows in October. He said if it breaches $30 an ounce, silver could test its all-time highs.

Silver has a lot of momentum and we haven’t seen it stall like gold; if it can get above $25, it could signal a long-term reversal. If silver gets to $30, there is not a whole lot stopping it from going higher.”

A recent study by Oxford Economics found investors would benefit from an average of 4 to 6 percent silver allocation within a diversified portfolio. This is far below the average investor’s exposure to silver.  The analysis also suggests that silver’s return characteristics are sufficiently different from gold to make it a valuable diversification tool and that it deserves its own portfolio commitment.