Four Key Reasons Gold Can Enhance Your Portfolio
Why buy gold?
The Relevance of Gold as a Strategic Asset report released by the World Gold Council offers four reasons to add gold to your portfolio.
What makes gold a strategic asset in the first place? The World Gold Council provides a quick summary of gold’s qualities.
Gold benefits from diverse sources of demand: as an investment, a reserve asset, jewelry, and a technology component. It is highly liquid, no one’s liability, carries no credit risk, and is scarce, historically preserving its value over time.”
The WGC offers four key ways gold can enhance an investment portfolio.
- Returns
- Diversification
- Liquidity
- Portfolio Performance
Global investment demand has reflected this, growing by an average of 15% per year since 2001. The gold price has increased almost seven-fold over the same period.
Most people think of gold primarily as an inflation hedge, and the yellow metal has lived up to this expectation. According to the World Gold Council, gold’s average annual return of 11% in US dollars over the past 50 years has outpaced the US and world consumer price indices (CPI). Gold does even better in extremely high inflation environments. In years when inflation was higher than 3%, the price of gold increased 15% per year on average.
Over the long term, therefore, gold has not just preserved capital but helped it grow.”
This confirms what Peter Schiff said in a podcast – inflation is good for gold and high inflation is even better for gold.
Diversification
Diversification has always been a crucial investment strategy. As the saying goes, you don’t want to have all your eggs in one basket. 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.”
Gold has actually outperformed many investment classes. Since 1971, gold’s long-term return is comparable to equities and higher than bonds. Gold has also outperformed many other major asset classes over the past five, 10 and 20 years.
The gold market is large, global and highly liquid. The WGC estimates physical gold holdings by investors and central banks total $4.8 trillion.
The scale and depth of the market mean that it can comfortably accommodate large, buy-and-hold institutional investors. In stark contrast to many financial markets, gold’s liquidity does not dry up, even at times of financial stress, making it a much less volatile asset.”
World Gold Council analysis concluded that allocating a portion of a portfolio to gold improves overall performance.
Our analysis of investment performance over the past five, 10 and 20 years underlines gold’s positive impact on an institutional portfolio. It shows that the US pension fund average portfolio would have achieved higher risk-adjusted returns and lower drawdowns if 2.5%, 5% or 10% were allocated to gold.”
In a nutshell, extensive analysis suggests that adding between 2% and 10% of gold to a US-dollar-based portfolio can make a tangible improvement to performance and boost risk-adjusted returns on a sustainable, long-term basis. Gold’s unique attributes as a scarce, highly liquid, and un-correlated asset demonstrate that it can act as a diversifier over the long term.
