Gold as A Strategic Asset—In 2019 And Beyond
The comments below are an edited and abridged synopsis of an article by Arkadiusz Sieroń
There are several good reasons why investors should add gold to a portfolio. Gold is a source of long-term capital gains, and the gold market is deep and liquid. Gold has not only outperformed all major fiat currencies, but also bonds and commodities. The gold price has increased by an average of 10% per year since 1971, when gold began to be freely traded following the collapse of Bretton Woods. This makes gold’s long-term returns comparable to stocks.
Gold has outpaced the US CPI. The end of the gold standard paved the way for higher inflation, so gold has soared in a new monetary regime in which fiat money can be printed in unlimited quantities to support monetary policy. In this environment, gold became one of the greatest hedges against inflation. In years when inflation has been higher than 3%, the gold price has increased by an average of 15%.
Gold is a great portfolio diversifier due to its low correlation to most mainstream assets. This is a desired feature during periods of heightened risk, when gold benefits from flight-to-quality, providing positive returns. The greater a downturn in stocks and other risk assets, the more negative gold’s correlation to these assets becomes. Gold is thus a safe-haven asset during crises, which reduces portfolio losses, and an insurance against tail risk.
This is why adding gold to pension fund portfolios would have resulted in higher risk-adjusted returns. For US and UK investors, holding 2% to 10% in gold as part of a well-diversified portfolio can improve performance.
Since the end of Bretton Woods, the number of private investors in the gold market has increased. Today, gold is more relevant than ever. The opportunity costs of holding gold have decreased substantially. In a world of ZIRP, NIRP, ultralow real interest rates or even negative bond yields, the no income stream generated by gold is turning from a problem into a blessing.
As we approach the next recession, gold will be in demand as a safe haven and a hedge against systemic risk, stock market pullbacks, and central banks’ unconventional monetary policies. In a heavily indebted world, a liquid asset with no credit or counterparty risk is literally worth its weight in gold.