3 Arguments For Owning Gold

The World Gold Council data shows that…26% of 2018 gold demand was for investment purposes while another 15% was demanded by central banks. Against that backdrop, there are three arguments for holding gold in a portfolio:

Benefits to Holding Gold

1. The correlation between monthly returns of gold and other asset classes has low or negative correlations to other major asset classes.

2. Holding gold in a portfolio can provide potential diversification benefits should a recession arise.3. Investors who wish to add an asset that offers a potential inflation hedge should consider gold.

Risk Factors to Holding Gold 

1. Gold generates no cash flows, no earnings, and requires storage costs and, [as a result,] this has influenced gold’s under-performance of traditional stocks and bonds over the longer term, since dividends and coupon payments are crucial drivers of total returns for stocks and bonds.

2. …The physical supply and demand of gold is crucial idiosyncratic driver of the commodity.

• On the demand side, central bank, investor and consumer preferences for the commodity have been relatively stable overtime, but they are subject to change.
• On the supply side, an increases in mine production could also weigh on gold.

3. …Lack of inflation may reduce its attractiveness and investors may shun the asset class should the market see a strong risk-on rally.

Conclusion

Gold has the potential to shine in times of market and geopolitical volatility. A small allocation to gold may be suitable for investors who are looking to real assets to diversify their portfolio. However, investors should balance the sizing of their position given the lack of yield and low current inflation expectations.

Editor’s Note: The above excerpts from the original article have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.