Gold is bought as a luxury good as much as an investment, and, as such, can play four fundamental roles in an investment portfolio, an analysis published by the World Gold Council (WGC) shows.
Firstly, gold is a source of long-term returns.
The WGC states that gold is not only useful in periods of higher uncertainty. Its price has increased by an average of 10% yearly since 1971 when gold began to be freely traded following the collapse of the Bretton Woods monetary management system.
And gold’s long-term returns have been comparable to stocks and higher than bonds or commodities, the council adds.
Secondly, it is a diversifier that can mitigate losses in times of market stress.
“Gold historically benefits from flight-to-quality inflows during periods of heightened risk. By providing positive returns and reducing portfolio losses, gold has been especially effective during times of systemic crisis when investors tend to withdraw from stocks.
“Gold has also allowed investors to meet liabilities while less liquid assets in their portfolio were undervalued and possibly mispriced,” the WGC notes.
Thirdly, gold is a liquid asset with no credit risk and has outperformed fiat currencies.
Gold benefits from its large global market. The WGC estimates that physical gold holdings by investors and central banks are worth about $2.9-trillion, with an additional $400-billion in open interest through derivatives traded on exchanges or over-the-counter.
Moreover, the gold market is liquid. Between $50-billion and $80-billion of gold is traded daily through spot and derivatives contracts over-the-counter.
Between $35-billion and $50-billion of gold futures are traded daily across various global exchanges.
“Gold-backed exchange-traded funds offer an additional source of liquidity, with the largest US-listed funds trading an average of $1-billion daily,” the WGC says.
Lastly, gold is a means to enhance one’s overall portfolio performance.
The combination of these factors mean that adding gold to a portfolio can enhance risk-adjusted returns, the WGC states.
“Over the past decade, institutional investors with an asset allocation equivalent to the average US pension fund would have benefitted from including gold in their portfolio. Adding 2%, 5% or 10% in gold would have resulted in higher risk-adjusted returns,” it points out.