Investment Strategies

Gold Boosts Risk-Adjusted Returns, Cuts Volatility - WGC Study

Tom Burroughes , Group Editor, London, 27 October 2011


Investors enjoy superior risk-adjusted returns and have a less volatile ride while doing so by holding a quantity of gold in portfolios, a research report from the World Gold Council argues.

Rising inflation, economic turmoil and secular demand from the expanding emerging market economies have propelled the yellow metal to record highs in recent months above $1,900 per ounce before retreating slightly, trading around $1,716 per ounce yesterday mid-afternoon in London. (To view a WGC price chart on the gold price, click here.)

The WGC, an industry group that publishes extensive data on the gold market and the trends affecting it, said a “distinct allocation” to gold within a portfolio including alternative assets such as private equity, hedge funds, real estate and commodities, can preserve capital and reduce risk without diminishing long-term returns.

Inflation worries and the sovereign debt woes of the US and eurozone have even reignited interest in gold’s centuries-old role as money, as doubts about government-mandated fiat money spread. (To view an article about the case for “inelastic” money, click here.)

Its report, Gold: Alternative investment, foundation asset, analyses the effect gold has when included in a portfolio of mainstream and alternative assets. It shows that portfolios with an allocation to gold of between 3.3 per cent and 7.5 per cent (depending on the risk tolerance of the investor and the currency of reference) deliver higher risk-adjusted returns while consistently lowering value at risk.

“Alternative assets have gained acceptance among private and professional investors over the past decade as they look to increase risk-adjusted returns. However, many of these assets can have higher correlations to mainstream assets than investors once thought. Including gold can produce distinct benefits to the performance of an alternatives portfolio due to its deep liquidity, low correlation to most asset classes and outperformance during periods of systemic risk,” said Juan Carlos Artigas, investment research manager at the WGC.  

Among other features of the report:

-- New money into hedge funds and private equity has doubled AuM over the past decade.  Over the same period, gold holdings by private investors have increased by 24 per cent. Gold remains an under-owned asset making up only 1 per cent of global financial assets in private hands;

-- Gold helps to manage risk effectively by increasing risk-adjusted returns and reducing extreme losses for a range of portfolios combining traditional and non-traditional assets;

-- The benefit of holding gold within a portfolio cannot be replicated by solely investing in non-traditional assets.

-- Gold acts as a cost-effective form of protection that does not negatively affect and sometimes benefits long-term expected returns, while reducing risk in times of economic turmoil;

-- During seven periods regarded to be "tail-risk" events from January 1987 – June 2011, portfolios that included gold tended to perform better (by either posting gains or reducing losses) than those without;

-- An allocation to gold can benefit investors with different levels of risk tolerance and diverse allocations denominated in dollars, euro and sterling.


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