Gold and alternative investments do mix

News Arnulf Hinkel, Financial journalist – 08.02.2018

It is generally known, and proven by studies such as "Gold as an asset class for institutional investors" (Mercer, 2017), that gold is an excellent means of diversification for traditional securities portfolios, especially in times of crisis. A recent analysis by the World Gold Council based on the PriceWaterhouseCoopers Global report "The rising attractiveness of alternative asset classes for sovereign wealth funds" published in 2018 suggests that gold can improve the performance of alternative investments such as private equity, hedge funds, real estate and real assets.

Alternative investments are on the rise 

For some years now, there has been increasing demand for alternative investments from institutional investors and buy-and-hold investors. In particular, alternative investments include trusts, insurance companies, pension funds and sovereign wealth funds. Regarding the latter two, alternative investments already account for 24 and 23 per cent of total investments, respectively. Alternative investments can lead to attractive returns, but they also have some downsides compared to traditional investment products: they usually lack liquidity, are more complex to analyze than traditional assets and correlate closely to the stock market, especially during downturns.

Gold can enhance the performance of alternative investments

According to the financial market experts of the World Gold Council, it is this weaknesses of alternative assets that make gold a useful counterpart: as an investment form more widely used than many alternative investments, it offers an opportunity to effectively improve portfolio diversification while it is also a source of positive returns in times of crisis. At the same time, an addition of gold to a portfolio increases the liquidity of the overall investment and promises a significant improvement of risk-adjusted returns, thus enabling a general improvement of the portfolio’s performance. According to the findings of the World Gold Council, this applies both to 50/50 and 75/25 portfolios.

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