Investors are being tested. Equities are down significantly for the year and 2022 has only just begun. High-risk speculative assets like crypto have performed even worse.
Meanwhile, inflation threatens “side line” money that investors are holding, as they wait to see how far the market will drop. As interest rate hikes loom there seem to be fewer places to invest. For most the goal has shifted from earning a decent return to merely preserving capital or minimizing losses. This chilly start to the year has many investors worried about what they’re in for over the next 11 months. Many are asking if gold can counterbalance some of the new risk that has crept into so many portfolios?
An analysis from the World Gold Council offers some answers.
Their research concluded that “adding between 4% and 15% in gold to hypothetical average portfolios over the past decade, depending on the composition and the region, would have increased risk-adjusted returns.”
The same report shows how many structural changes have buoyed the performance of gold in recent decades. For example, emerging market growth – like that seen in India and China – have broadened the group of people able to buy gold. Additionally, an increase in central bank demand has boosted gold’s performance as more nations rely on the metal in their reserves. Finally, the global financial crisis has alerted more investors to the importance of gold as a strategic asset to offset risk.
These benefits might lead one to ask why gold has not become a mainstay in retail investor portfolios. The answer might be the mania surrounding equities in recent years.
In 2015, 2017, 2019, and 2020 large cap growth stocks were the highest performing asset class. This pattern has attracted millions of investors. The problem: the music has stopped.
While 2022 is still young it seems unlikely that the high performance of growth will continue. Valuations remain high. Meeting those expectations will require even greater profits amid a backdrop of supply chain challenges.
Simultaneously, the fervor around tech stocks has fallen as recent earnings reports have disappointed. This underperformance has prompted concern because so much of the growth propelling indexes like the S&P 500 is supported by a few tech heavyweights. The five highest performing stocks have massively outpaced all others in the index. Those top five have returned 25.6% annualized over the past five years. In comparison the other 495 stocks have delivered an annualized 6.5% return over the same period. Most of these five stocks are found within the FAANG group consisting of Facebook, Amazon, Apple, Netflix, and Google.
Gold offers an degree of diversification that is disappearing from indexes. Consider that over the last half century “the price of gold in US dollars has increased by an average of nearly 11% per year since 1971,” according to the same body of research from the World Gold Council. Over the last five years gold has outperformed commodities, cash, US bonds, hedge funds, and global bonds.
Early signs of the year ahead has given investors reason to rethink their strategy and consider gold.
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