We will look today at the current and historical discussions around gold ownership through the eyes of an investment. A quantitative study has shown that investors have benefited from gold as a hedge to other asset classes and an alternative return source during different economic and financial regimes.
According to the study, while gold’s performance has been “rougher than equity markets” over the last few decades it “has demonstrated the ability of outperforming equities during times of equity stress as well as bonds in several different economic scenarios.”
How important is gold in diversifying today’s investments?
Even the staunchest supporters of a portfolio and gold investment theory had their beliefs completely shattered over the last 15 years. Due to the unprecedented volatility of global markets and extreme boom-and-bust, traditional advisers and investors were forced to reconsider their risk management strategies and create new portfolio designs. The conventional wisdom has been pushed to the limit by asset classes.
Surety can be a good thing. Given the current climate of uncertainty, it is important to develop a portfolio that minimizes volatility and drawdowns while still generating a reasonable return.
Discussions about alternative asset classes have sparked a passionate debate, especially the importance of precious metals and commodities, notably gold. Gold is included in many portfolios by conventional wealth managers, although the reasoning may be weak and less scientific than it should be.
The article provides a quick review of the gold debate, a detailed analysis of how gold can be used to diversify a portfolio and a few eye-opening statistics that show gold has a much greater role than previously thought in portfolios that are aiming for risk-adjusted return.
* Market scenarios:
The report, based on data dating from 1973 to 2017, offers an in-depth analysis of relative gold performance under seven different market scenarios.
* Actual returns on the 10-year Treasury are negative
When real yields increase, stocks and bonds are often good long-term investments. It is the worst case scenario when rates actually fall, as this keeps asset managers and pension funds awake at night.
Stock market in bear market
Gold is also a great way to protect yourself from stock market declines. It would seem that Treasurys should perform the best in a downturn of stocks or bad calls, but it hasn’t been true.
Prices of commodities are increasing:
You can see that gold, while it outperformed other commodities during bull markets for commodities, lagged behind commodities in bear markets. Gold generated positive returns, and commodities only managed lower losses. It behaves very well, and can be used to replace exposure to commodities in a wider range.
It is a fact that the value of U.S. dollars has declined:
A U.S. Dollar Bear Market can be caused by many factors, ranging from changes in the monetary and trade policies to deficits. Gold performed exceptionally well when the U.S. Dollar declined. It outperformed all other asset categories by a large margin. Many investors see gold as their currency of last resort.
The U.S. market is in a downturn.
Treasury Bonds: U.S. Treasurys show lower values when interest rates and yields increase. Gold has traditionally provided the best returns in situations such as this. It even beats stocks.
Inflation on the rise:
Gold has performed very well in periods of rising inflation, when the price level for all goods and services was consistently increasing. The Consumer Price Index’s (CPI’s) annual rate of change can be positive during periods where there is an increase in demand for goods and services.
The market is volatile:
Our definition of high volatility includes times when VIX levels reach the top percentile in their 28-year history. Treasurys performed well when volatility was high because investors “flew towards safety.” Gold also did well during these periods, with an average annualized return of 5% and acting as a “crisis hedge” for investment portfolios.
Variables that influence the gold price
Before making an investment in gold, the investor must be familiar with the different factors that affect the gold price. It is important that investors are aware of the factors which influence gold prices.
The demand and supply of goods
The price of any commodity is affected by two factors, if they are not the most important. Gold is no different. It is hard to mine gold because it’s a commodity. Each year, more gold must be extracted. It is clear that the rising demand for gold will lead to higher gold prices.
* Inflation:
Gold is, as we have already said, a popular and trusted hedge against inflation. Gold remains unchanged even though money’s value decreases as inflation increases. Inflation rates are increasing, so investors choose to buy gold. The price of gold can change due to the increase in demand.
Rates of Interest
The impact of interest rates on prices of gold is fascinating. As interest rates increase, investors tend to sell gold and gold ETFs in order to invest instead in deposit accounts. There will then be less demand, resulting in a decrease in gold’s price. When interest rates fall, however, gold is more attractive to investors than deposits. The cost of gold would rise in this case as demand increases. Interest rate fluctuations are negatively correlated with changes in gold prices.
* Import:
Gold prices in India are also affected by the volume of imported gold. India is second in the world for precious metals consumption. To meet their needs, India must import gold. When the gold supply increases and import duties are reduced, the price of gold will fall.
Performance of other markets:
Success in different markets is important, such as the currency and equity markets. Investors might decide to invest in gold when the price of these markets is declining. Gold prices can increase due to increased demand.