Gold; most effective but under-represented in portfolios

Gold; most effective but under-represented in portfolios

19 September 2019 from Anna Svahn

To diversify its portfolio into different asset classes with low correlation has repeatedly shown to generate higher risk-adjusted returns than if one only exposes itself to, for example, equities. Still, many investors today are left with portfolios that do not contain the most effective asset when it comes to acting as airbags when the rest of the portfolio is volatile.

Exposing to a mixed commodity ETF with the hope that a significant portion of the investment will be weighted against gold usually proves to be a bad idea since in most cases precious metals are underrepresented in commodity baskets.
Raw materials themselves are a complex type of asset and all sub-groups are characterized by different things. This means that what favors the price of energy can be negative for another subgroup and vice versa. However, when it comes to gold, the precious metal has six advantages over other commodities:
  1. Gold has delivered higher risk-adjusted returns over a longer period compared to other commodity sub-groups
  2. Gold offers a more efficient diversification
  3. Gold overperforms other commodities during periods of low inflation
  4. Gold has lower volatility
  5. The value of gold is preserved over time
  6. High liquidity

Thus, using commodities as an asset class to diversify their portfolio can give you several benefits, but picking out gold as an individual asset can generate even higher results over time.

What one should remember when it comes to commodities is that they are speculative assets. This makes it worse for them to simply think that they will generate higher returns over time because raw materials do not generate any real growth. In other words, they should rather only be used as a hedge at times when equities are more expensive in relation to commodities, so that later, if the price of commodities in relation to equities is higher, they are sold to allocate their capital to a larger proportion of shares or bonds. With gold it is different. Since gold itself is a value-preserving asset rather than a way of speculating, it should also serve another function in a portfolio.

The problem with today's commodity index is that they simply lump all the raw materials into a basket. In most cases, energy and industrial metals are overweight, while gold is rarely more than 12 percent, and in most cases much less than that. Since gold has completely different properties than other commodities, it should also be treated as its own asset class.

Gold performs better than other commodities under low inflation

Inflation is also important to consider when considering how to expose yourself to commodities. Gold, unlike other commodities, tends to retain its value even during periods of low inflation.

In summary, it can be stated that gold is and should be treated as its own asset class rather than bundled with other commodities. For those who diversify their portfolio with the precious metal to use as a hedge in uncertain times or simply do not trust that the value of the local currency is preserved over time, an entirely separate portion of the portfolio must be allocated to gold.

 @Anna Svahn


Important legal information

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

26/11/2022 10:05:14


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