Gold: A valuable addition to any securities portfolio – not only during times of crisis

News 12.03.2016

It is common knowledge that gold works just fine as a safe haven. Every investor who was invested in gold when the worldwide financial crisis hit in 2008 could experience firsthand the value preserving and loss-balancing effect of the precious metal on his investment portfolio. However, the valuable contribution gold is able provide to the securities portfolio is not limited to crisis scenarios. As an investment complementary to stocks and bonds, gold can help to smooth out the expected long-term return of a moderate risk portfolio. At the same time, gold reduces volatility, and also serves as a hedge against inflation, since it helps to preserve the purchasing-power parity. In addition to its ability to hedge against stock price losses, gold has a strategic relevance facilitating private investors to benefit from in bear markets.

To which extent the addition of gold can affect a portfolio consisting of European large cap stocks and government bonds was analyzed – and quantified – by the global management consultancy Mercer LLC. Based on an observation model featuring a switch scenario with a probability of 85% being a regular capital market scenario and of 15% being a crisis scenario, the effects of the addition of 5% gold were analyzed – which is the percentage numerous experts recommend for achieving a balanced investment portfolio.

Within the crisis scenario of the observation model, gold performed - not surprisingly - excellent and succeeded in gaining 6.08% – almost as much profit as the shares in the portfolio had lost (-6.49%). At the same time, government bonds increased by 2.65%.

Within the regular capital market scenario, gold performed with a plus of 3.51% – much weaker than the equities (8.67%) in the portfolio, as expected – but still superior to government bonds (3.06%). The quantitative analysis of the study, which can be downloaded free of charge here, concluded that investing in gold is an effective diversification of an existing portfolio of equities and government bonds – not only in times of crisis.

Arnulf Hinkel
Financial journalist

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