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Gold Remains Vital For Portfolios, Analysts Say

Eliane Chavagnon, London, 6 December 2011

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Gold is still a key component of a balanced portfolio, despite recent uncertainties following the euro crisis, according to Henry Lancaster, senior investment analyst at Coutts. Another report from the World Gold Council reached the same conclusion.

The precious metal's effectiveness as a hedge has been questioned since it failed to prosper in the face of the euro crisis, and some commentators are even dubious that it can sustain current levels, due to pressures inflicted by the eurozone quandary.

However, although not entirely immune to volatility, gold will be upheld by responses to crises, such as this week’s European Central Bank agreement to provide new dollar credit lines, Lancaster said in an investment note. 

Moreover, while gold has suffered in dollar terms, it has, nonetheless, been resilient in comparison to other assets and currency values. For example, the price of gold in Indian rupees hit an all-time high this month, and further increases in the amount of currency generated through gold are now expected. 

Yields on 10-year US Treasuries are suggesting that interest rates will be less than inflation over the next decade. As investors lose confidence in fiat currencies, gold should continue to harvest benefits, Lancaster said. 

In a note from the London-based World Gold Council, it highlighted new research from the firm New Frontier Advisors which it said confirmed gold’s role as a diversifier and foundation asset in the portfolios of euro-based investors, especially at a time of heightened currency and investment risk.

The report, ‘Gold as a strategic asset for European investors’, commissioned by the World Gold Council, explores gold as a strategic asset across five sets of asset allocation studies, including four using historical data spanning 1986 to 2010, and one using the 1999 to 2010 time frame.

The paper highlights that an optimal strategic allocation to gold for euro-based investors ranges from 2-3 per cent for the most diversified and lowest risk portfolios, to 4-9 per cent for portfolios split 50/50 between equities and bonds, to as high as 10 per cent for portfolios with the majority of assets in equities. 

The investment approach to the yellow metal has changed radically over the past two decades; the former UK Labour government, for example, is often chided for the decision to sell a large chunk of the UK's official gold reserves at a small fraction of its current price. At the time of the sale (late 1990s), gold was no longer seen as an important core holding for central banks. However, strains on the banking system, which have even raised question marks about government-printed "fiat money", have increased the attractions of gold for some investors.

 

 

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