Close Close

Portfolio > Alternative Investments > Hedge Funds

‘Bonds’ Limited Upside’ Points to Role for Gold, Says Gold Council

Your article was successfully shared with the contacts you provided.

Gold prices reached a nine-week high Friday as investors turn to the metal as a hedge against inflation given Fed policy to keep interest rates down and amidst continuing concerns over tensions in Iraq and Ukraine.

Gold futures for August delivery inched up 0.4% to $1,318.90 an ounce Friday morning, close to their 2014 high of $1,322.50 on April 15, according to Bloomberg.

Regardless of the level at which the precious metal is trading, the World Gold Council says investors have much to gain by embracing it, as the group reported Thursday. 

“Some people may not want liquid alternatives [like gold] in their portfolios, because they already have hedge funds and private equity holdings,” explained Juan Carlos Artigas, director of investment research for the World Gold Council, in an interview.

“Actually, we say that whatever your portfolio is, investors should consider gold, given the way it’s shown to improve performance and lower risk.”

Plus, low returns on fixed-income holdings make the case even stronger. “We suggest a strategic — not a tactical — allocation” for advisors and their clients, Artigas explained.

“With the current environment with bonds and their low returns, which are not able to provide the same cushion as in the past two decades for investors – in other words, limited upside — we have found that increasing investors’ allocation to gold can be beneficial.”

(The SPDR Gold ETF (GLD) hit a high of about $133 in mid-March; it traded just below Friday at $127.)

Current Picture

Of the roughly $153 trillion in investments tracked by the Bank of International Settlements, World Gold Council and other groups, just 1% is held in gold. About 5% is kept in other liquid assets, 5% in money-market products, 43% in equities and 47% in fixed income.

“Gold is broad and very liquid. There are tons of ways to invest in it,” Artigas said. “It depends on how the investors want to look at cost structures and from other perspectives. Gold is really beneficial in terms of performance and diversification.”

Analysis of returns from January 1990 to March 2014 shows that gold is much less correlated to the stock markets than hedge funds, private equity, REITs and commodities, according to the council.

Gold is also good at protecting investors from risk-tail events.

“This is a fancy way to say that it offers protection from systemic risk that has a low probability; but if it happens [like with the financial crisis, sovereign debt-crisis, etc.], it can have devastating consequences.”

The council suggests that investors that typically hold about 60% equities and roughly 40% bonds, look at diversifying with a 5% to 6% gold holding.

For investors holding hedge funds, REITs or other liquid alternatives, an allocation of 3% to 4% “may be optimal,” Artigas says.

This allocation of gold “is very important, which is a key finding of the paper,” he notes.

World Cup

For those looking to hold gold in other ways — such as via the coveted FIFA World Cup trophy, it should be noted that the World Cup winner will receive a replica that is gold plated.

The current trophy, which was first awarded in 1974, is made of 18-carat gold and weighs 13.61 pounds. It remains in the possession of FIFA.

The original trophy was awarded to Brazil, who won the tournament for the third time in 1970. It was stolen in 1983 and is believed to have been melted down and sold.

FIFA made a replica of the first trophy using 3.97 pounds of gold.

Check out Morningstar Goes to Cash on ThinkAdvisor.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.