GOLD
Start making the lustrous metal part of your investment portfolio, writes STEPHEN SHORT
Why you should make room for the precious metal in your portfolio
There’s a good reason the lexicon refers to apex happenings, events or organisations as setting the “gold standard”. Gold holds its own for multiplicitous reasons: as a luxury good, an investment, a reserve asset and, increasingly, as an indispensible technological component. It’s highly liquid, no one’s liability, carries no credit risk, is scarce and historically it preserves its value over time. The Chinese in bygone dynasties espoused the efficacious nature of gold and even considered it offered ''immortality''.
When it comes to contemporary finance and dynamising your portfolio, gold may be a less-frequented commodity, but it’s an asset that repays investor loyalty like few others.
There’s a quartet of ways in which gold works for you as an investor: it generates long-term returns; acts as a diversifier and mitigates losses in times of market stress, provides liquidity with no credit risk and can also improve overall portfolio performance.
The World Gold Council estimates that adding between 2 and 10 percent
in gold to a hypothetical US pension fund average portfolio over the past decade would have resulted in higher risk-adjusted returns.
Economic expansion is good news for gold, as periods of growth are supportive of jewellery, technology and long-term savings. Conversely, risk and uncertainty also works in gold’s favour, as market downturns often boost investment demand for gold as safe haven.
Last year, gold had its best performance since 2010, rising by 18.4 percent in US-dollar terms. It also outperformed major global bond and emerging-market stock benchmarks over the same period. In addition, gold reached record highs in most major currencies except the US dollar and the Swiss franc. Investor appetite for gold was apparent throughout the year, as seen by strong -T. flows and robust central-bank demand.
But what about the start of the new decade and beyond? Despite the global pandemic and Covid-19, gold was – until recently – one of the few assets with positive returns this year. It was up 10 percent on the year as of March 9, more than any other major asset class.
But setbacks in its performance aren’t without precedent. Gold experienced pullbacks at the onset of the global financial crisis, too, falling between 15 and 25 percent in US-dollar terms a couple of times during 2008. But by the end of that year, gold was one of the few assets – alongside US treasuries – to post positive returns.
Investors face an expanding list of challenges around asset-management and portfolio construction. Among them are low interest rates, which may push investors to seek riskier assets at elevated valuation levels and, for US pension funds in particular, may
increase the value of liabilities, possibly reducing their funding ratio. Other concerns will be continued financialmarket uncertainty, ranging from geopolitical tensions to expectations of diverging global economic growth and an increase in asset volatility.
Faced with the above, gold is not only a useful long-term strategic component for portfolios, but also one that’s increasingly relevant in the current environment.
Gold is not only a useful long-term strategic component for portfolios but also one that’s increasingly relevant
David Tait, chief executive officer at the World Gold Council, commented: “The retail gold market is healthy, with gold being considered a mainstream choice. But what really excites me is the untapped part of the market: those people who’ve never bought gold but are warm to the idea of doing so in the future.
“Two issues need to be addressed to engage with these potential gold buyers: trust and awareness. This market can flourish if we can build trust across the broad spectrum of gold products being sold, and raise awareness around the positive role gold can play in protecting people’s wealth.”