How much gold should be in your clients' portfolios?

Study says gold should make up as much as 10% of a well-diversified portfolio
APR 25, 2014
Gold should make up as much as 10% of an optimal portfolio, according to a study by the World Gold Council. Gold offers a hedge against risk in emerging markets and also stands to benefit during upswings, the report said. The World Gold Council is the market development organization for the gold industry. The quest for an appealing hedge has been especially relevant in recent years, as emerging markets encountered rough waters following the collapse of the commodity supercycle and the wind-down of the Federal Reserve's quantitative-easing program, said Juan Carlos Artigas, the director of investment research at the World Gold Council. Even investors who are not directly exposed to emerging markets should still consider hedging with gold, since ripples from emerging markets are increasingly felt throughout the global economy, he said. There are several reasons why gold is appealing, said Mr. Artigas, who was the lead author of the report. Gold is highly liquid, offering investors easy access during downswings. Gold also has a negative correlation to the market during times of risk, as investors flee to the metal's perceived safety, he said. During upswings, meanwhile, gold's popularity among consumers in developing countries allows the metal to benefit from rising consumer demand, the report said. "Gold is not just a tactical asset to enter today and exit tomorrow but a long-term part of an investment strategy due to its role as a risk mitigation vehicle," Mr. Artigas said. There are drawbacks to holding gold, however, said Barry Fennell, a senior research analyst at Lipper Corp. In the past decade, gold prices spiked on uncertainty associated with the financial crisis, as well as the commodity supercycle. The metal rose from around $650 per ounce in 2007 to more than $1800 in 2011, according to data from Kitco Metals Inc. However, the metal had fallen to $1,325 per ounce as of March 24, according to the Wall Street Journal. There is no guarantee that high gold prices will persist, Mr. Fennell said. Gold is not an interest-bearing asset, he said, meaning there is no reason to expect that the metals will offer a positive long-term return. Gold's price fluctuates with supply and demand. This is quite different from Treasury bonds. As yields on U.S. Treasuries rise, the promise of a guaranteed income stream will make these bonds an increasingly appealing source of long-term risk reduction, Mr. Fennell said. The rise in interest rates on Treasuries has partly contributed to outflows from both emerging markets and gold, he said. "Gold seems to me to be better as a tactical play, rather than as a long-term holding in a portfolio," he said. ​

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