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Analysts Predict Gold Could Replace Bonds in Investor Portfolios

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Analysts Predict Gold Could Replace Bonds in Investor Portfolios

By John McDonald 

Buying gold is not just a hedge against inflation and market volatility. 

According to a recent analysis based on Bloomberg data, investing in gold with just 5 percent of the weight of your portfolio could result in dramatically improved risk-adjusted performance over a portfolio using the standard 60-percent-stocks/40-percent-bonds division. 

The researchers suggest removing 5 percent from the bonds division of a portfolio to create a 60:35:5 ratio instead. 

In the study, the research team analyzed the 15-year period ending with December 2018. They followed portfolios with 60 percent allocation to the S&P 500 Index and 40 percent allocation to the Bloomberg Aggregate Bond Index. 

Over the 15 years between 2004 and 2018, those portfolios produced about a 10 percent annualized gain and displayed an annualized risk of about 10.5 percent. Reweighted portfolios, on the other hand, with allocations of 60 percent to stocks, 25 percent to bonds, and 15 percent to gold, produced annualized returns of 11.2 percent and annualized risks of 11 percent. 

When the gold allocation was halved to 5 percent, creating that 60:35:5 ratio, the portfolios generated annualized returns of 12.8 percent and annualized risks of 12.5 percent.

The team then pushed the analysis back another four years, to 2000, and discovered that just 5 percent allocation of gold in a portfolio created “superior or equal risk-adjusted returns to a 60-40 portfolio 79 percent of the time,” the group reported. Ryan Giannotto, director of research at GraniteShares, which co-sponsored the study, explained, “Gold is essentially non correlated to all market factors.” 

While most investors think of portfolio diversification as a response mechanism to protect their investment capital from diverse factors that could diminish returns, adding gold to the equation enables a portfolio to perform with greater independence from the market, especially in times of market volatility.

“People often only think about how something correlates to equities, but you really need to think about how it correlates to everything else in the portfolio,” Gianotto added. 

However, other experts in the precious metals field note that the research covers a time period that is particularly bullish for gold and other precious metals. One investor, who recommends her clients allocate 15 percent of their portfolios to gold at the present time, added as a caveat, “There is a season for everything, and correlations change.” 

She predicted that during time periods when gold is less of a safe-haven asset and stocks and other investment vehicles are less overvalued, the relationships might change.

Ultimately, even investors treating gold as a safe-haven investment should monitor market cycles in order to make sure they are more heavily invested in the precious metal when the timing is appropriate, as it is at present, and adjust their strategies accordingly. 

When gold prices correlate closely with other asset classes in terms of price spikes, risk-adjustment trends may become less significant and an investor buying gold for risk-adjustment purposes may opt to liquidate some gold in order to cash in on the spike while recalibrating their risk adjustment.

“The zero-correlation feature [earns] gold its place in a portfolio,” Giannotto concluded. “Any price return is very much an ancillary benefit.” 

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