Gold’s utility in client portfolios and exactly how much of those portfolios should be allocated to the yellow are frequently debated topics. With the SPDR Gold Shares (NYSEARCA: GLD), the largest gold-backed exchange traded fund, up more than 8% year-to-date, it’s reasonable to expect gold conversations are increasing as well.
In other words, particularly against the backdrops of elevated inflation and profligate, dollar-destructive government spending in the U.S., it’s an appropriate to revisit gold’s benefits. For advisors discussing gold’s pluses and minuses with clients, an ideal starting point is examining the primary benefits associated with bullion investments.
Those are the potential for capital appreciation, risk mitigation and wealth preservation. These traits are important to articulate to gold-interested clients because physical ownership of bullion and the related, traditional exchange traded funds don’t feature coupon payments or dividends.
Each of capital appreciation, risk mitigation and wealth preservation are worth examining in their own rights. By doing so, advisors can make educated, informed decisions regarding gold allocations.
Risk Management Perks
Within the gold’s risk management merits, there are multiple sub-categories, including portfolio diversification, reduced correlations to other assets and outright risk reduction during times when equities and/or bonds falter. The first two can be lumped together, making examination efficient.
“Gold has demonstrated a low and negative historical correlation to many financial indices over time, potentially helping to smooth out volatility and preserve wealth,” according to State Street research. “For example, gold has shown a 0.01 and 0.09 monthly correlation to the S&P 500 Index and Bloomberg US Aggregate Bond Index, respectively, since the 1970s. This persistent and historically low correlation to many other financial assets is rooted in gold’s diverse sources of demand — both cyclical and countercyclical — which is illustrated during different phases of a full economic cycle.”
As for risk management during tumultuous market settings, that point is what it implies. Gold has a long-running though 100% guaranteed reputation as a safe-haven asset.
Historical data confirm that during market-straining events, such as trade wars, traditional wars, Black Monday in 1987, the bursting of the dot-com bubble, the aftermath of the 9/11 terrorist attacks and the global financial crisis, gold outperformed the S&P 500.
For advisors that need more convincing on the correlation front, from 2009 through today, gold has been less correlated to the MSCI World Index than broader commodities strategies, hedge funds, real estate and private equity, confirming its status as a credible portfolio diversifier.
When it Comes to Preserving Wealth, Go for Gold
Although gold doesn’t pay dividends or interest, its portfolio diversification and risk reductions are additive when it comes to preserving wealth.
“But an allocation to gold may support preserving wealth on a longer-term basis too, with its historical positive longer-term risk-adjusted returns during a variety of business cycles helping investors weather unforeseen risks and capital impairments that can erode a portfolio’s value over time,” concludes State Street.
Bottom line: Large allocations to gold probably aren’t needed to for any clients. However, gold, in modest form, is relevant to a broad swath of clients and now is a good time to discuss it.