|Gold In Portfolio Can Boost Performance, Reduce Risk--World Gold Council
26 October 2011, 8:00 a.m.
New York (Kitco News)-- Economic uncertainty and turmoil in the U.S. and Europe during the past several years have put gold into sharp focus and its inclusion can boost portfolio performance and reduce investor risk, according to a report from the World Gold Council.
The report, "Gold: Alternative Investment, Foundation Asset," analyzes the effect gold has when included in a portfolio of mainstream and alternative assets, such as private equity, hedge funds, real estate and commodities. The report shows that a proper allocation of gold can preserve capital and reduce risk without diminishing long-term returns. Portfolios with an allocation to gold of between 3.3% and 7.5% shows higher risk-adjust returns while consistently lowering Value at Risk, the study showed. It noted that the percentage of investment depends on the risk tolerance of the investor and the currency of reference.
"Alternative assets have gained acceptance among private and professional investors over the past decade as they look to increase risk-adjusted returns," said Juan Carlos Artigas, investment research manager for the World Gold Council and a principal in developing the report.
Artigas said many of the assets can have higher correlations to mainstream assets than investors once thought. "Including gold can produce distinct benefits to the performance of an alternatives portfolio due to its deep liquidity, low correlation to most asset classes and outperformance during periods of systemic risk," he said. "Gold's unique characteristics make it a good source of diversification, and also provide a foundation which investors can use to manage risk and preserve capital."
The report by the World Gold Council, the market development organization for the gold industry, also looked at performance in other periods of turbulence similar to the current economic climate. The report said that on multiple occasions gold would have reduced the loss during these periods of stress while keeping similar or better risk-adjusted returns over long periods of time. The study listed seven periods ranging from the Black Monday stock market crash in 1987 to the 9/11 terrorists attacks to the "Great Recession" from 2007-2009 to the current European sovereign-debt crisis.
There is robust evidence for adding gold as a foundation to a portfolio, according to the study. Over the long run, risk-adjusted returns tend to increase, losses to diminish and capital is preserved. In most periods of financial stress, "portfolios that include gold tend to perform better than those without," the report said. It noted this was achieved by either posting gains or reducing losses.
In an interview with Kitco News, Artigas said gold exchange-traded funds, popular in the U.S. and Europe, have shown some growth in China, India and Asia, but are still just part of a large gold market that has many vehicles for purchase, and one that still has strong physical leanings. He said ETFs have been popular in the West because they gave investors easier access to gold in a venue where they already buy their other products. In Asia there are retail outlets in multiple locations and the market is more complete, Artigas said.
In India, he said, ETF flows have increased, doubling from 2010. But he said it is a matter of which segment of investors they are appealing to. "It is a vehicle," he said. "It's just a different way to invest."
By Terry Wooten, of Kitco News; firstname.lastname@example.org