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For Gold's Sake

According to Warren Buffet "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." We agree that, on its own, gold may not qualify as a good investment.

In a portfolio context, however, the picture could prove different, especially when central banks around the world are doing everything they can to re-inflate and geopolitical risk is high.

In our standard long-only multi-asset strategies, gold would receive a 12% allocation today vs 11% on average since 2006. In our standard long/short model, gold would get a 12% allocation today vs 9% on average since 2006. This would suggest that, in the current market environment, gold is a good diversifier to multi-asset strategies.

Assuming you did include gold in your portfolio, what would its contribution be to your portfolio’s performance?

The answer is charted below for our standard long only and long/short strategies. In each case, contribution was positive in seven out of the last ten years, and negative in 2013, 14, and 15.

This is not exactly a surprise given gold’s rally from 2006 to 2012 and its correction thereafter, but it is instructive to see the actual impact on portfolio performance over time.

Performance Contribution of Gold - Long-Only Portfolio

chart1

Performance Contribution of Gold - Long/Short Portfolio

Data source: ALPIMA Ltd


The upshot is that in a stable world with “normal”, i.e. moderate & positive interest rates, gold may not make much sense as an asset, although it did act as a decent hedge against inflation historically.

But in a sub-zero-rate world with global uncertainty aplenty, the upside of owning some gold in a diversified portfolio may outweigh the downside.

Such analysis can be conducted on our platform with a few clicks using any portfolio as a starting point.

Please contact us if you would like to know more.