The Case for Gold Diversification Remains Strong

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Despite rising inflation, gold has traded in a choppy and corrective manner recently. Some gold investors may be wondering if gold still offers the same level of portfolio protection as it has in recent years.

While gold is down about 6% year-to-date and silver is down about 10%, that comes on the heels of a 22% gold gain in 2020 and a 44% silver gain last year.

Investors may not realize that gold has delivered long-term average annual returns of 10.8% since the elimination of the gold standard in 1971 – on par with long-term stock market returns. And, when you compare gold performance to commodities over time – gold outperforms.

Consider this data from the August 25 World Gold Council report: Gold: the most effective commodity investment:

“In the Q4 2018 global equity selloff, for example, the S&P 500 fell 15% and commodities fell 9%, yet gold rose 8%. And in the 2020 COVID selloff, the S&P 500 fell 20%, commodities fell 17%, while gold returned 2%. In both recent cases, gold not only protected portfolio assets but also delivered positive returns, while broader commodities behaved more like a risk-on asset.”

Understanding historical performance of assets like gold, bonds, stocks and REITs during previous reflationary periods – can offer insights to investors on what may lie ahead for gold in this cycle. The World Gold Council research reveals that in past reflationary periods, gold historically lagged early in the cycle – just as we are seeing now. But, significantly, gold outperformed over the long run.

The new research confirms that gold allocations of up to 10% in a portfolio delivered better risk-adjusted returns than those with simply broad-based commodity allocations.

If you’ve been wondering about gold’s performance this year, this historical data reveals that what we are seeing is typical. In fact, for long-term investors, the current lower price level of gold allows you to “buy low” and receive more gold in exchange for your dollars.

Here are six key characteristics that the World Gold Council highlighted about gold:

  • It has delivered superior absolute and risk-adjusted returns to other commodities over multiple time horizons.
  • It is a more effective diversifier than other commodities.
  • It outperforms commodities in low inflation periods.
  • It has lower volatility.
  • It is a proven store of value.
  • It is highly liquid.

If you are looking for diversification that counts as a store of value for your wealth, consider increasing your allocation to physical gold. Historical data suggests that gold is on the verge of its next big upswing in price as the economy moves farther into the reflationary phase. If you are under-allocated to gold, don’t miss this opportunity to increase your gold allocation to 10% or even higher depending on your desire for protection.

Gold is a unique asset class that delivers powerful diversification and wealth appreciation opportunities. “Looking at other commodities, some can be considered luxury goods, some have technological applications, and some are basic, everyday products. Some are used to hedge against inflation, some protect against currency devaluation, and all provide a degree of diversification in an investment portfolio. However, only gold performs all these functions,” the World Gold Council said.

Want to explore how you could implement more wealth building assets into your portfolio? Read about our diversification strategy here.

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