Adding gold to an investment portfolio preserves capital, increases portfolio efficiency and reduces risk.
Many studies, including one recent study by PwC, have shown gold to be an effective diversifier, as it is negatively correlated with the major portfolio asset classes. Gold is also unique in terms of both its limited supply and the broad geographical reach of its demand.
The World Gold Council recently carried out an in-depth analysis into the performance of gold as a strategic asset. The report on their findings, published in July 2012, states that during times of economic crisis gold delivers better risk-adjusted returns, as well as reducing losses:
During most market crises over the last 25 years, gold has consistently increased portfolio gains…
..in 78% of all the cases analysed, gold reduced the loss experienced during eight tail-risk events...during the 2008–2009 recession investors saw a reduction in losses by 227 to 676 basis points in their portfolio (£22,700 to £67,600 on every £1m of investment) for various levels of risk tolerance…in the out-of-sample analysis, we found that all portfolios containing gold significantly reduced losses during the worst two periods linked to the European sovereign debt crisis..
The World Gold Council’s report supports the findings of previous research conducted by the World Gold Council, Oxford Economics and New Frontier Advisors.
During times of economic stress, other financial assets that are by definition simultaneously someone else’s liability face increased risk due to the potential failure of that counterparty over which the investor has no control.
Physical gold has no counterparty risk. It is independent from other asset classes. Additionally, it requires no management. Ownership of allocated physical gold is essentially risk-free.
Investments of any kind including precious metals bear a substantial degree of risk. The opinions of Chelsemore Mangement Limited (Owners of Gold Insight) should not be relied upon as any implied or explicit guarantee of return. We are not authorised or regulated by the Financial Services Authority to provide any investment advice and our opinions should not be construed as financial advice.
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