Gold or bonds? That is the (wrong) question

For a long time, government bonds and bonds of large companies were considered the preferred means of diversification for risk-averse investors such as pension funds or conservative private investors. However, with ETFs on various stock indices, new possibilities for portfolio diversification arose in Europe at the beginning of the millennium, and especially since the introduction of zero or negative interest rates by many central banks, bonds have become less attractive. Should gold, thus, take their place in investors’ portfolios?

Gold and bonds: similar performance since 1973

According to a study by Liechtenstein-based Neue Bank, a quantity of gold worth US$100 has seen an appreciation to a total of US$2,428 from the end of Bretton Woods until late 2020; US government bonds with the same initial value rose to US$2,441 over the same period. However, the interest rate on US government bonds in question was clearly in positive territory for most of the period under study – in 1981 it even exceeded 15 per cent. In terms of pure performance, the two asset classes as portfolio diversifiers did about equally well. In global economic stress periods, however, it has been an entirely different story.

Gold usually comes out on top in times of crisis

According to the study, gold performed significantly better than government bonds during the financial crisis; moreover, in view of the danger of default by some states, the respective bonds lost much of their lustre for investors, since total losses of the invested assets are possible with this asset class. During the Coronavirus pandemic, investor portfolios with a 10 per cent gold allocation performed better with a gain of 2.4 per cent than portfolios with a 50/50 mix of stocks and bonds, which generated a loss of -1.59 per cent. This data is according to a recent study by Zürcher Kantonalbank Austria. Have bonds, thus, become superfluous in investor portfolios? Most certainly not, since unlike gold, they yield interest – even if the interest on most bonds is currently far from sufficient to compensate for the inflation rate.