Gold as a strategic addition to investments

Performance of gold

As with almost every commodity, the price of gold is determined by supply and demand. However, supply is relatively inelastic because new gold is mainly extracted through mining. Demand, on the other hand, is dynamic and depends on various factors, which in turn are influenced by the short and long-term global macroeconomic situation. These factors are partly cyclical and partly countercyclical in nature. Since they can dominate in different economic and market phases, gold has a characteristic that makes it a unique investment.

The price of gold has risen significantly over the last few decades. However, the return on an investment in gold was generally lower than that of a global stock index. There were also phases in which the price of gold fell or stagnated over long periods of time. Gold returns over different holding periods are illustrated in the chart below:

Hedging properties of gold as an investment

Gold is generally viewed as a “safe” investment. This means that investors use the precious metal as a hedge for their portfolio during times of increased uncertainty or market risk.

Particularly during the worst periods of stock market losses over the last 45 years, gold has generated a significantly higher return than global stocks. In many cases, gold's returns were not only relatively better, but also absolutely positive. Examples include the loss phases during the bursting of the dot-com bubble (2000-2002) and the financial crisis (2007-2009), in which gold recorded a significantly positive return.

Even in times of high inflation and geopolitical risks, gold has proven to be a profitable investment, which underlines the versatility of its hedging properties.

Gold as a strategic addition to a multi-asset portfolio

A key aspect that makes gold interesting from an investment perspective is its low correlation with other asset classes such as stocks and bonds. As a result, the addition of gold can improve the diversification of a portfolio and thus have a positive influence on its risk-return profile.

The chart below shows the results of constructing optimal portfolios of global stocks, US treasuries and gold. The expected return was maximized for various target volatilities of the portfolio. What is striking is that gold is allocated in all risk profiles and is weighted more heavily in the portfolio as the target risk increases. It also shows that the portfolio weighting of gold is less sensitive to changes in the permitted risk compared to stocks or bonds.

A moderate allocation of gold can therefore improve the return-risk profile of a multi-asset portfolio and proves to be sensible from a strategic perspective.