Many investors in the gold market who assume they have adequate exposure to the precious metal are underinvested.
A study by the World Gold Council (WGC) shows that investing in a fund that tracks a broad-based commodity index is not comparable to direct gold investment. These indices usually have a relatively small weighting in gold. Inadvertently, you end up with a lesser exposure to gold than you realize.
Investment managers and typical index funds look at indices like the S&P 500 to outline their investment portfolio. Such indices are, obviously, big on stocks. For a lot of investors, stocks generally do well, at least going by the last few years. However, investors are painfully aware of market shocks that can make investing in stocks feel like riding a rollercoaster.
This reality is why gold investments are often part of such fund portfolios. The ability to absorb shocks and diversification of investments is a critical component of a great portfolio. However, the strength of exposure to gold in such funds may not be as solid as you believe.
According to the UBS Global Family Office Report 2019, the exposure to gold in family funds is 0.8 percent on average. In the S&P GSCI, the exposure is 3.37 percent, which is still significantly lower than other significant assets. The Bloomberg Commodity Index is quite impressive, at 12 percent.
In the UBS report, equities in developed markets take up an entire quarter. Many other investments, including riskier ones like real estate, rank higher than precious metals. In summary, not many investment funds are ready to absorb macroeconomic shocks like a recession.
Here is what Juan Carlos Artigas, WGC’s director of investment research, said about gold:
“If you are a buy-and-hold investor, if you are trying to create long-term strategies, the evidence overwhelmingly shows that gold is a more effective strategic asset than commodities alone.”
In making stock investments, investors have to manage their risk. Failure to prepare is preparing to fail. Stocks can have a long bull run only to take rapid downturns. Over the years, gold has shown that it is a solid investment regardless of market cycles. As a matter of fact, gold appreciates when other assets and securities take a beating.
A 10% weighting in gold can be good enough. This percentage can be in the ratio of 5 percent in bullion, with the other 5 percent in high-quality gold mining stocks. Such a distribution provides decent exposure to gold. Lower levels of investment in gold stocks could mean that your exposure to gold may be lower than you assume.
Anyone who has been paying attention knows that gold has been on a roll in 2019. With a gain of close to 14% thus far, there is no doubt that more people are looking to gold for stability.
Gold-backed ETFs have taken the rally as an incentive to increase their gold holdings. Gold holdings are now at a level reminiscent of the last global financial crisis. As of September 2019, holdings went up to 2,855 tons. This figure is a record high, surpassing the 2,839 tons ETFs held in November 2012.
Central banks across the developed world have maintained record low interest rates. This means that bond yields are not as high as they used to be. Traditionally, stock market investors would invest in stocks and balance them with government bonds to manage risk. Stocks represented the high-risk investment, while bonds seem like a stable alternative. With bond yields at historic lows, it is better to manage risk using other stable assets. The most durable stable asset of all is gold.
Gold ETFs are doing well because of the consistent gains. The precious metal is approaching record highs again on the back of global uncertainty and uneven growth. If you are looking for a way to balance your portfolio moving forward, gold has to be considered a strong contender. Gold is a better investment for buy-and-hold investors than commodities alone. In addition, a millennia-old resume doesn’t hurt its cause.
The slight downturn of about $50 in recent weeks does little to change the general trajectory of gold. With decreasing bond yields, gold is in a prime position to allow investors to run for cover. Even though the US bond yield curve went negative sometime in August, gold has had a consistent run.
Amidst global uncertainty over trade and China’s growth slowdown, gold is an excellent hedge investment: an investor can leverage gold to hedge against inflation. Its value does not have a direct correlation to the regular market but rather is based on the scarcity in gold supply. Gold has zero to negative correlation to the performance of other assets and securities. This independence is why gold is such a great hedge against inflation.
Gold is remarkably easy to liquidate. For example, an investor looking to diversify can look at assets like real estate; however, in a dampened market, you may have a hard time liquidating such an investment. The reason is that demand is not always consistent. On the other hand, gold has a solid demand pretty much all the time. Central banks have driven demand over the past few decades and look set to continue doing so.
This consistency remains whether the prevailing economic conditions are great or not. A person holding bullion in Venezuela has as much confidence in their precious metal as someone in the USA. Notably, Venezuela is in the middle of historic hyperinflation; its paper currency is literally worthless. Gold can maintain and even appreciate in spite of the prevailing macroeconomic conditions.
In summary, gold checks a lot of boxes for a portfolio investor. You will find no other asset with the credibility and consistency of gold. The fact that its value is insulated from other assets and securities makes it perfect for portfolio diversification.
As governments across the world strive to sustain growth, it is unlikely that monetary policy will change anytime soon. Some of these policies work towards low or even negative interest rates! Central banks like the Federal Reserve are trying to make certain the cost of borrowing remains low to spark the economy.
However, investors in stable government bonds are not enjoying the yields they have had historically. This situation is because the interest rates have an effect on such returns. Even though bonds are a relatively stable hold, the lower return negates the purpose.
A stock rally or bust scenario is in the cards. If you are looking to make the most of the markets while having an insurance policy for shocks, gold is a great hold. Such dynamics make for a solid gold return in the near future. The enduring possibility of a global recession makes gold holdings an excellent proposition.
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