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…Safety and stability of capital has been difficult to find in 2020, as many volatility indicators, such as the VIX, continue to point towards future uncertainty. Gold, however, has gone against the grain in 2020, as it has continued its strong historical performance and has done an excellent job at preserving wealth.
- Gold had appreciated 29.02% in US dollars (USD) and 33.20% in Canadian dollars (CAD) as of July 31, 2020.
- Gold has increased an average of 10.6% (USD) and 9.8% (CAD) since 2000.
- Gold’s average annual return across major currencies since 2020 is 12.07%.
With tremendous upside available for gold amid future uncertainty within the markets, and a proven historical track record of strong performance, it is surprising that gold does not hold a larger allocation size within most investor portfolios….To put gold’s historical performance into better perspective, an analysis was completed to compare the risk and returns from various asset classes.
(The chart above displays the volatility and return of major asset classes throughout the last 20 years…using the compound annual growth rate (CAGR), while risk is measured using annualized standard deviation (from monthly price changes throughout the period). The CAGR is the rate of return assuming that profits were reinvested at the end of each year over an investment’s lifespan.)
Throughout the asset classes under observation:
- the average CAGR was 5.84% while the average standard deviation was 0.1634…
- gold yielded the highest CAGR of any asset class at 10.3% CAGR which was higher than any other asset class…
- only gold miners (10.3%) and US REITs (9.5%) provided similar returns…[but] both come with enhanced risk due to the higher standard deviations.
- The 0.1682 standard deviation of gold was only slightly higher than the average of 0.1634, while
- gold miners displayed a 0.4096 standard deviation during the same time frame.
- the BCOM is the most widely used benchmark for the commodities market yet gold consists of only 12.24% of the index, and a return of -30.6% YTD, [as shown in the chart below,] clearly indicates that holding commodities within a portfolio should not be considered as the equivalent to holding physical bullion.
- the HUI index of the 15 largest…gold production companies displayed tremendous upside from 2000 to 2010 [as shown in the chart below] but high levels of volatility were displayed, as prices have yet to recover from the steep drop-off experienced following 2012. Similar to the BCOM, the holding of gold miners within a portfolio should not be considered an equivalent to purchasing physical bullion.
Throughout the 20-year period, the standard deviation using monthly changes in prices indicates that:
- physical bullion provides investors with a higher return (20-year return of 610%) and less risk [than a basket of gold miners or a basket of assorted commodities].
- The HUI index had a standard deviation of 0.4094 compared to a 0.1670 standard deviation for physical bullion over the past 20 years.)
Taking both risk and return into consideration shows that gold has been an optimal asset class for bolstering wealth preservation over the last 20 years…
There is ample evidence…[that] adding gold to your portfolio can increase returns and reduce overall risk. These measures typically focus on allocating a range between 2% and 10% in order to create a truly balanced portfolio…[Check out the table below for details.]
As displayed in the chart above:
>A 100% allocation to gold (portfolio 1) would have provided the highest CAGR of 10.3%.
>Each reduction in gold allocation results in a lower compounded annual growth rate for each portfolio throughout the observable time period.
>Comparatively speaking, portfolio 6 and 7 represent traditional 60/40 portfolios consisting of only stocks and bonds.
>Choosing to hold 100% gold over the 20-year period rather than investing in a traditional 60/40 portfolio would have been the most beneficial decision for wealth preservation.
1. Portfolio 1 would have turned the $100,000 investment into $709,991 by the end of the time-period.
2. Portfolio 6, which holds constituents of a typical 60/40 portfolio, would have yielded $338,308 during the same time period. That is a difference of $371,683, or over $18,500 per year.
3. Holding 100% physical bullion throughout the time period displays the best benefits for wealth preservation, as the monetary difference between the portfolios is more than double. At BMG Group, we have continuously advocated the addition of gold to traditional 60/40 portfolios, and the rationale is clear. Gold provides significantly higher returns for your portfolio.
In conclusion, it is evident that holding gold should be a priority for investors considering the looming economic uncertainty within the economy, as well as the historically superior performance of gold over the last 20 years.
It would be naïve for investors to continue ignoring the benefits of adding physical bullion to their portfolios during these turbulent times.
Editor’s Note: The original article by Nick Barisheff has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. 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.
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