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Time to replace bonds with gold in your portfolio?

Commentaries & Views

Recently, the WGC published a fresh Investment Update entitled It may be time to replace bonds with gold.Is it?

According to the report, investors are now facing the environment with flat to inverted yield curves, stock valuations at extreme levels that historically preceded meaningful stock sell-offs, and an increasing set of geopolitical concerns, including trade tensions, Brexit and Middle East turmoil. Given this backdrop, gold should be part of each investment portfolio as a safe-haven asset.

However, the WGC claims that gold has an even greater role to play today. This is because the central banks have shifted to a new regime of easy monetary policy, thus reducing expected bond returns. The point is that with negative yielding debt at all-time highs, gold may become a more attractive portfolio diversifier.

After all, the opportunity costs of holding gold have declined recently thanks to the central banks’ dovish shift and ultra-low bond yields. Normally, the fact that gold does not pay any interest or dividends can deter investors, but in a crazy world of negative interest rates totaling more than $17 trillion (that’s about 30 percent of all investment-grade securities bearing sub-zero yields), the opportunity costs of holding gold have decreased substantially or even transformed into competitive advantage.

Hence, it seems that replacing some bonds with gold could be reasonable, especially since that the yellow metal has historically performed well in the year following a dovish U-turn in the Fed’s stance, and it also performed exceptionally well when real interest rates were negative or just close to zero.

An analysis based on historical returns, when interest rates were at more normal levels, suggests that gold should amount to 2-10 percent of the investment portfolio, depending on the particular asset composition and the risk taken. But adjusting the model for lower expected returns for bonds in a low interest rate environment we face today, the optimal gold allocations increases by an additional 1-1.5 percentage point to 3-11.5 percent of the investment portfolio.

OK, would you like to know what I think about the WGC’s newest investment update, and whether it makes sense? If so, I encourage you to read the full version of today’s Fundamental Gold Report, which assesses and develops the WGC’s research. In order to receive the following (posted bi-weekly) analyses and stay informed on all things fundamentally golden, please subscribe now on our website. Right now the first 3 weeks of subscription are for mere $9 – we encourage you to catch the discount while it’s still available.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.