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The value of gold in investment portfolios |
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Expert Insight from the World Gold Council By: Richard Scott-Ram |
| The World Gold Council is an authoritative source for research on gold and its relationship to modern portfolio management. A not-for-profit organization, the World Gold Council disseminates information that will allow investors and portfolio managers to make informed decisions. |
For additional information, contact:
Richard Scott-Ram Chief Portfolio Strategist World Gold Council 444 Madison Ave. 3rd floor New York, NY 10022 Tel: 212-317-3840 Fax: 212-688-0537 richard.scott_ram@ wgc.gold.org Website: www.gold.org Mr. Scott-Ram is not affiliated with, nor compensated by U.S. Global Investors. volatility. |
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Current Advantages There are several reasons why gold should be viewed as a valuable asset for today’s portfolios. 1. The gold price is currently at the low end of its historical range. Therefore, the upside potential for the gold price is perceived to be greater than the downside potential. 2. Second, there is a possibility that we are entering a period of "stress" or instability. According to World Gold Council (WGC) research, gold is a particularly effective portfolio stabilizer during such periods. Portfolios consisting of “traditional” assets (equities and bonds, for example) are increasingly being augmented with “non-traditional” assets that have low/negative-correlations with “traditional” assets. 3. Commentators believe that the U.S. dollar is headed for devaluation, presumably helping the dollar price of gold to rise, given gold’s long inverse relationship with the dollar. 4. Gold has behaved broadly in line with historical trends in recent quarters, rising by some approximately five percent since August 1999, while the S&P 500 has declined by approximately eleven percent. Long-Term Advantages in Gold as a Portfolio Asset Amid today’s mainstream asset classes’ uncertainty, portfolio risk management is a hot topic. Alternative assets are promoted as portfolio diversifiers. When people talk of portfolio diversification benefits, it should be remembered that buying an investment is one thing. The state of an asset’s liquidity also is an important consideration. Gold’s liquidity is one of its critical investment advantages. Gold can be traded around the clock at narrower spreads and more rapidly than most investments. Gold's pre-eminent investment characteristic is its low or negative correlation with other commonly-held asset classes. The more negative the correlation between the diversifier and the pre-existing portfolio, the lower the overall volatility of the new portfolio. Gold tends to become more volatile during periods of financial "stress" or instability. This is helpful because the greater the volatility of a negatively-correlated asset, the more it reduces portfolio volatility. Research suggests that even modest weightings of gold can improve the consistency of a wide range of portfolios. Since 1970, the U.S. dollar price of gold generally has moved in the opposite direction to equities. Stock markets have experienced extraordinary capital growth. Rationally, one might expect some "reversion to the mean." than 3% - 5% of your portfolio in gold or gold stocks. Past performance is no guarantee of future results. Conversely, the gold price has fallen beneath its long-term trend. And yet the supply/demand outlook appears robust, with annual consumption outstripping mine production by more than 50 percent and production expected to fall in the medium term. Central banks, which have filled the primary supply deficit in recent years, also are unlikely to increase either their sales or lending to the market. It seems clear that the status quo cannot be maintained for very long. Investors are realizing that gold is a credible and desirable alternative investment for portfolio diversification. Risk-averse fiduciaries would be wise to consider a modest portfolio weighting of gold. |
| The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 3% - 5% of your portfolio in gold or gold stocks. Past performance is no guarantee of future results. |
