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Four Fundamental Roles of Gold in Your Portfolio

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Why should you buy gold?

A report published this week by the World Gold Council pinpoints four key reasons.

Gold is a highly liquid yet scarce asset, and it is no one’s liability. It is bought as a luxury good as much as an investment. As such, gold can play four fundamental roles in a portfolio.

  • A source of long-term returns
  • A diversifier that can mitigate losses in times of market stress
  • A liquid asset with no credit risk that has outperformed fiat currencies
  • A means to enhance overall portfolio performance.

According to the WGC, gold has become more of a mainstream investment option. Investment demand for the yellow metal has grown an average of 18% per year since 2001.  Traditionally, gold has been viewed primarily as a diversifier, a hedge against inflation, a store of wealth and a risk mitigator.

But over the last 40 years, gold has also provided positive returns. The price of gold has increased an average of 10% per year since 1971. This actually represents better returns than many other assets. In fact, gold’s long-term returns have been comparable to stocks and higher than bonds or commodities.

As a strategic asset, gold has historically improved the risk-adjusted returns of portfolios, providing returns while reducing losses and providing liquidity to meet liabilities in times of market stress.”

Real Money

We often say “gold is money.” The yellow metal possesses all of the characteristics of money Aristotle listed 2,000 years ago. The philosopher said sound money must be durable, portable, divisible, and have intrinsic value. You can check off all four of these characteristics for gold. You can also add a fifth characteristic to Aristotle’s list. Sound money cannot be easily manipulated by central bankers – i.e. created out of thin air.

In fact, gold has outperformed all major fiat currencies over the past century.

This includes instances when major economies defaulted, sending their currencies spiraling down, and after the end of the Gold Standard. One of the reasons for this robust performance is that the available supply of gold has changed little over time – growing less than 2% per year through mine production for the past two decades. In contrast, fiat money can be printed in unlimited quantities to support monetary policies.”

The WGC report also covers gold’s proven track record as a diversifier, pointing out that during the 2008–2009 financial crisis, hedge funds, broad commodities and real estate, long deemed portfolio diversifiers, sold off alongside stocks and other risk assets. This was not the case with gold.

Based on historical analysis, taken together, these factors mean adding gold to your portfolio can yield higher returns over the long-term.

Over the past decade, institutional investors with an asset allocation equivalent to the average US pension fund would have benefitted from including gold in their portfolio. Adding 2%, 5% or 10% in gold would have both increased returns and reduced volatility, resulting in higher risk-adjusted returns.”


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