Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Bitcoin, Crypto Market Black Swans from Google to Obsolescence - 1st Aug 21
Gold Stocks Autumn Rally - 1st Aug 21
Earn Upto 6% Interest Rate on USD Cash Deposits with Binance Crypto Exchange USDC amd BUSD - 1st Aug 21
Vuze XR VR 3D Camera Takes Near 2 Minutes to Turn On, Buggy Firmware - 1st Aug 21
Sun EXPLODES! Goes SuperNova! Will Any planets Survive? Jupiter? Pluto? - 1st Aug 21
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
WEALTH INEQUALITY WASN'T BY HAPPENSTANCE! - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Dear Gold, Thanks for the Diversification

Commodities / Gold and Silver 2012 Jul 17, 2012 - 11:33 AM GMT

By: William_Bancroft

Commodities

Best Financial Markets Analysis ArticleIn these pages we regularly mention the unique attributes of gold bullion investment, and how gold is able to diversify a portfolio like nothing else. We’ve cited a gold investment’s role in Harry Browne’s legendary Permanent Portfolio, the role gold has played in Jim Rogers’ stellar investment record, and why Swiss bankers and traditional money managers always steered clients to put >10% into gold bullion.


Research just out from the World Gold Council (WGC), titled ‘Gold as a Strategic Asset for UK Investors’, adds to the evidence that gold investing adds diversification to a portfolio like nothing else. This research argues that gold is the ultimate diversifier, and more relevant to investors today than ever. For more detailed analysis, read the WGC’s full report.

How gold investment offers diversification

The WGC’s new research finds that across a wide range of investment strategies, from conservative, moderate, to aggressive, gold ‘is a significant contributor to portfolio efficiency by reducing risk-adjusted returns and reducing expected losses’. Essentially gold can help balance many types of portfolios, and crucially help protect against losses. The WGC argue that holding between 2.6% and 9.5% own ones wealth in gold can help achieve this diversification.

Within the wider research piece the WGC also find, as others have before, that over a 25 year sample period gold has strong ‘risk-hedging credentials’. To cut through the jargon again, this means that gold is indeed good at protecting your portfolio when bad things happen.

Gold’s ability to reduce losses was tested… and during multiple periods of financial markets turmoil. During most market crises over the last 25 years, gold has consistently increased portfolio gains or reduced its losses. We found that in 78% of all the cases analysed, gold reduced the loss experienced during eight tail-risk events. For example, we found that during the 2008–2009 recession investors having a modest allocation to gold saw a reduction in losses… for various levels of risk tolerance… we found that all portfolios containing gold significantly reduced losses during the worst two periods linked to the European sovereign debt crisis.Investing in gold with part of your portfolio was found to benefit UK investors with different risk tolerances over a significant time period, and crucially during financial crises.

Why does diversification matter for gold investors?

Gold is still a small investment market, with wider levels of education about gold and relevant investment products generally being low. But, what the latest WGC research adds to is a compelling body of analysis that finds that gold’s unique properties can offer a lot to investors.

However, gold’s unique ability to diversify a portfolio is the trump card that should be the focus of attention here. Investors are sat on large amounts of cash at the moment. This is understandable, investment markets have been confusing and tricky to navigate since 2008 and the financial system continues to exhibit stresses and strains.

Gold investors might deem a gold bullion investment a superior form of liquidity, than holding dollars, euros, pounds or yen. At the very least, with its unique diversifying properties, gold should be considered by other investors as another form of liquidity. A savings mechanism without default risk, free from the influence of central bankers, that offers protection against losses when the bad times get really bad.

Diversification matters more often than we realise

One of man’s limitations is his lack of ability to predict the future. As a result we use the past as a guide to try and map the future. Unfortunately this method of prediction and modelling is akin to driving looking in the rear view mirror. Mainstream finance and economics suffers from the same afflictions, and given that >90% of investment returns occur during financial crises, investors must be well prepared for such market events. Steady gains over 10 years can be wiped out in days and weeks, and bumps in the road arrive more regularly than the priests of high finance predict.

There are other ways of looking at the world though that plans for crises to happen more often than we seem able to predict. This school of thought, involving the likes of Nasim Taleb, Benoit Mandelbrot and Didier Sornette, holds that financial markets and the global economy are simply too complex as systems for the human mind to fully comprehend. Investors wanting to learn more on this might enjoy books like The Black Swan (probably the best start) and the (Mis)Behaviour of Markets (perhaps a better second book), where black swans, complexity theory, fractals and more are introduced and put in context.

Returning to investing in gold, what this means for savers and investors is that given crises and bad things happen more regularly than we can predict (JPMorgan stock holders anyone?), investments that add diversification and crucially reduce losses during the bad times are worthy of significant consideration.

Money on the side-lines looking for a home

Gold’s unique properties and diversifying properties should be considered a little more by investors and money managers given that they currently hold such relatively large amounts in cash. In the UK investors are demonstrating a trend of withdrawing money from traditional investments (equities and bonds), and opting for the ‘safety’ of cash instead. The WGC’s latest study adds to research on this phenomenon.

A recent survey of high-net-worth (HNW) investors conducted by the Scorpio Partnership revealed that of the discretionary managed-asset pool, 40% were not conforming to their benchmark and that during the second half of 2011, respondents had been building their cash positions at the expense of equity and fixed income allocations. This dash to cash has two potentially detrimental repercussions for investors. The first is the stagnation of their capital due to lack of income from cash holdings with low and even negative real yields. The second is the concern that monetary stimulus eventually leads to unavoidable and problematic inflation.You don’t need to be an investment guru to have serious concerns about equity markets, bond defaults and money printing, and this capital currently sitting in cash might look for other homes.  Given gold investment’s diversifying properties, the owners and managers of some of this capital should consider gold at least as an alternative adding new features and extra diversification to a portfolio.

Within this dynamic, the Financial Services Authority’s (FSA) Retail Distribution Review (RDR) will soon give retail money managers more scope for diversification and wider asset allocation. This provides the potential for some of these mom and pop cash holdings to look elsewhere for a more optimal home. For more on this, read our guide to RDR and gold investment.

For investors wanting diversification, a more balanced portfolio and protection against the unforeseen, gold bullion investment stands ready to answer the call.

Will Bancroft

For The Real Asset Company.

http://therealasset.co.uk

Aside from being Co-Founder and COO, Will regularly contributes to The Real Asset Company’s Research Desk. His passion for politics, philosophy and economics led him to develop a keen interest in Austrian economics, gold and silver. Will holds a BSc Econ Politics from Cardiff University.

© 2012 Copyright Will Bancroft - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in