Gold is a unique asset: highly liquid, yet scarce; it’s a luxury good as much as an investment. Gold is no one’s liability and carries no counterparty risk. As such, it can play a fundamental role in an investment portfolio.
Gold acts as a diversifier and a vehicle to mitigate losses in times of market stress. It can serve as a hedge against inflation and currency risk.
Key facts that investors should know:
- Gold is a mainstream asset driven by many factors, not just investment demand
- Gold is one of the most effective diversifiers - due to its dual nature as a consumer good and investment
- Gold provides competitive returns compared to other major financial assets
- Gold offers downside protection and positive performance
- Over time, fiat currencies – including the US dollar – tend to fall in value against gold.
The combination of these factors means that adding gold to a portfolio can enhance risk-adjusted returns.
But how much gold should investors add to achieve the maximum benefit? Portfolio allocation analysis (based on the seminal work of Richard and Robert Michaud) indicates that investors who hold between 2% to 10% of their portfolio in gold can significantly improve performance. This is also true even when assuming a conservative average annual gold return of a modest 2% to 4% – well below its actual, long-term historical performance.
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Average annual gold demand ~4,100 tonnes* (approx US$166bn)
Gold demand estimates by sector:
*Based on 10-year average demand estimates ending in 2016. Includes jewellery, technology, bars, coins and ETF demand. It excludes over-the-counter transactions. Figures may not add to 100% due to rounding. Source: Thomson Reuters GFMS, World Gold Council