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Portfolio > Portfolio Construction

The Case for Investing in Gold Now

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If you’re concerned the stock market will continue to struggle as the coronavirus spreads and bonds will continue to yield less than 2% even on the long end, you might want to consider a small allocation to gold in client portfolios.

Gold prices have rallied about 7% year to date — close to three times the gains in the S&P 500 before the selloff on Monday, Feb. 24 — while bond yields are at or near historic lows in the U.S. and in negative territory in many other developed economies. Gold is now trading near $1,670 an ounce, its highest level since early 2013, boosted in part by a flight to safety stemming from the spreading coronavirus. 

“Why lock into very low or negative rates when you can have another long-duration asset?” asks John LaForge, head of real asset strategy for the Wells Fargo Investment Institute.

He calls gold the “chameleon of assets, at one moment attached to macroeconomy or the dollar and the next minute attached to something else.”

What it’s not attached to historically is the stock or bond market. It is uncorrelated to both, says Paul Buongiorno, chief investment strategist at Tiedemann Advisors. Gold is “a great hedge against market shocks and rising inflation” and has performed well during recessions, says Buongiorno, who called gold a “great diversifier” in portfolios.

The yellow metal is a “great asset to add to more conservative portfolios,” says Buongiorno, who recommends taking an equal but small pro-rata share from equity and bond allocations in those portfolios to end up with a 3% to 5% allocation to gold.

“We are in an environment where gold has historically demonstrated a facility to increase in price for a significant number of years,” says George Milling-Stanley, chief gold strategist at State Street Global Advisors, marketing agent for the SPDR Gold Shares ETF (GLD), which invests in physical gold bullion through its underlying trust.

Gold is a “safe” investment with a “store of value” during tumultuous times like today, buffeted by  geopolitical risks from Afghanistan, Iran, Iraq, Syria, North Korea and the U.K. (Brexit), uncertainty about the upcoming U.S. presidential election and, more recently, the spreading coronavirus.

At the same time gold is supported by strong demand for jewelry and central bank reserves, especially from emerging markets, while supplies are fairly stable, according to Milling-Stanley, who says its price could reach as high as $1,700 an ounce this year. “Gold is the original liquid alternative,” he said.

LaForge says gold could be on the verge of a long-term supercycle if interest rates remain at historically low levels in the U.S. and around the world and the yellow metal breaks above the $1,888 high reached in 2011.

“Watch interest rates and watch the growing amount of negative-yielding debt globally,” says LaForge, but he reminds investors that gold doesn’t have a yield and therefore no beneficial compounding effect. “You’re speculating with gold.”

For those advisors interested in adding gold to portfolios, the easiest and cheapest way is through the SPDR Gold Shares ETF, known as GLD from State Street Global Advisors, or the iShares Gold Trust (IAU) from BlackRock. Both ETFs invest in a trust which owns gold bullion. The expense ratio of IAU is 25 basis points; for GLD it’s 40 basis points.

Milling-Stanley recently published a report for State Street showing that a 2%, 5% and 10% allocation of gold would have boosted returns while reducing risk in multi-asset portfolios during the 15 years from 2005 through 2019. The highest returns and highest Sharpe ratio, a measure of risk-adjusted returns, were found with the highest allocation. 

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