A recent analysis says gold can play several valuable roles in a portfolio.
A recent analysis by the World Gold Council highlighted the multiple roles that gold can play in an investor’s portfolio. Looking at an article from allaboutalpha.com that covered this analysis, the WGC focused on gold’s returns and its performance against other assets over three time periods: 10 year, 20 year, and the 47-year period since 1971.
According to the article, in 1971 President Richard Nixon put an end to the gold standard by allowing the dollar and gold to float independently of each other, making the last period particularly important. The WGC’s chart for that timespan shows gold as the third best performing asset, right after U.S. and EAFE stocks.
Over the course of the last 47 years, gold beat out other commodities and came far ahead of U.S. cash and U.S. bond aggregates. According to the article, the WGC believes this showcases gold’s ability to move beyond its traditional role of capital preservation and provide returns to its investors.
Among gold’s most treasured properties is also its lack of correlation. While hedge funds, commodities and real estate are viewed as portfolio diversifiers, they are sold off in times of panic just as quickly as stocks and other risk assets. The 2008-2009 crisis is an example of the strength of gold’s diversification – investors ran from every other asset class and flocked towards gold, which stood out against its supposed haven competitors.
Adding to the metal’s appeal is its scarcity and the method through which it is obtained writes the article. Gold is separate from other commodities because it’s never consumed – the amount of gold on the planet has remained the same, potentially going back a million years. And although gold is infamously difficult to obtain, the spread of mining operations ensures that the metal is available even when a mining region experiences unrest.
Gold’s depth and liquidity are also properties that investors in the metal can take comfort in. WGC data shows that physical gold holdings by central banks and investors amount to approximately $2.9 trillion. The broader gold market trades between $150 billion and $220 billion a day, a volume that exceeds all of the S&P 500’s stocks, the euro-yen trade and U.K. gilts.
Part of why gold works so well as a diversification tool is the range of parties interested in the metal states the article. Besides jewelry-related purchases, which make up for more than half of the demand, gold is also bought by manufacturers of high-end electronics, by individual investors in the form of bars and coins, and by central banks, the latter having been net buyers for eight years.
As a result, the WGC concludes that gold is an empirically sound asset which has improved the performance of portfolios time and time again.