The Case for Gold Within a Diversified Portfolio

October 2018

Amid the plethora of investment options available today, in an unpredictable world there remains a solid case for holding gold within a basket of assets such as those comprising a self managed
super fund.

1. Risk Hedge
Unlike equities and bonds, gold carries no liability risk. For this reason people have been attracted to it as a refuge when market turbulence has intensified and geopolitical tensions have risen.
During such times when there has been a ‘flight to quality’ gold has often outperformed other investments.

Commonly called the ‘crisis commodity’, gold has for centuries been used as a hedge against financial risk, currency weakness and inflation.

In more recent times its use as a wealth preservation tool was illustrated during the global financial crisis of 2007-09.

A research paper based on Bloomberg and World Gold Council data concluded that retail and institutional investors could benefit from holding gold in their portfolios. According to the World Gold Council the research showed that maintaining 2% to 10% of a portfolio in gold could enhance overall portfolio performance over the long term.

2. Gold as a Diversifier
The key principle of modern portfolio theory is that investors should hold a range of assets featuring a degree of diverse correlation.

Correlation is a measure of how asset prices move relative to one another. The lower the correlation, the less these assets move in the same direction at one time.

Low correlation would therefore be expected to minimise portfolio volatility and enhance overall risk-adjusted returns under different macroeconomic and geopolitical conditions.

Historically, gold has proven to have a low correlation with other asset classes and for this reason many investors continue to hold gold within their portfolios.

The World Gold Council found that even a modest allocation to the precious metal could help reduce risk without sacrificing returns for portfolios that include alternative investments.

It conducted extensive research based on data from leading financial institutions and service providers including Barclays, JP Morgan, MSCI and Standard and Poor’s using long-term strategic returns, and 20-year volatilities and correlations. This found, the World Gold Council concluded, that a holding of the metal could be beneficial across the risk spectrum.

3. Inflation Hedge
One of the most compelling arguments for gold is its history of preserving purchasing power during times of high inflation. Unlike fiat currencies, the precious metal cannot be devalued by
governments or central banks.

As the famous anecdote tells us, an ounce of gold was enough to purchase a fine toga in Roman times and today is still able to buy a decent suit.

In a far more detailed statistical analysis of the precious metal’s purchasing power, Professor Roy Jastram of the University of California found gold had proven to be an effective store of value in
the US and Britain over more than 450 years stretching back to 1560.

Professor Jastram’s classic evidence of gold’s property as an inflation hedge was updated in 2009 by esteemed economist and statistician Jill Leyland. The former vice president of Britain’s Royal
Statistical Society reiterated that gold had, despite some price fluctuations, ‘repeatedly shown its ability to safeguard wealth through crises’.

4. Gold as a Direct Investment
Due to its unique confluence of demand and supply (discussed below) gold has, as a long-term strategic investment, yielded competitive returns for investors.

Investors have long relied on gold during periods of market uncertainty or high inflation, activity which has influenced the gold price in the short and medium term. However one of the essential determinants of the gold price in the long run is global income growth.

Analysis conducted by the World Gold Council based on Bloomberg, NBER (the US National Bureau of Economic Research) and ICE (Intercontinental Exchange) Benchmark Administration data stretching back to 1971 showed that gold has delivered positive returns over the long run.
The investigation concluded that gold had often outperformed major asset classes including US cash, US bonds, US stocks, EAFE (Europe, Australasia and Far East) stocks and other commodities.

5. Supply and Demand
Gold demand continues to be driven by jewellery and investment, while the increasing popularity of smartphones and other electronic devices is buoying industrial consumption.

GFMS Thomson Reuters and the World Gold Council argue that an expanding global middle class, particularly in the world’s two largest gold consumers China and India, translates into an
additional source of demand momentum.

Meanwhile the supply of gold is finite and cannot be created at will. Central banks can print money, but they cannot produce gold.

Summary
In an increasingly uncertain and turbulent world, the case for gold remains compelling.
A finite resource with unique qualities, gold has been valued as a store of wealth for hundreds of years encompassing countless periods of geopolitical tension and market volatility.

Australia is the world’s second largest producer of gold and through The Perth Mint Australian SMSF investors have a unique opportunity to add gold to their portfolios.

For more information go to www.perthmint.com

Sources:
Gold preserves wealth and acts as a risk hedge in investment portfolios, World Gold Council, September 2015

Gold Investor
Risk management and capital preservation
World Gold Council June 2014

GFMS, Thomson Reuters Gold Survey 2018
www.gold.org/what-we-do/gold-investment/why-invest-in-gold/gold-as-an-investment

Disclaimer
Past performance does not guarantee future results.
The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances.
The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.

 

 

 

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