Portfolio impact – 1. Risk/reward profile

31 March, 2023

Risk/Reward profile

Long-term returns, liquidity and effective diversification all benefit overall portfolio performance. In combination, they suggest that the addition of gold can materially enhance a portfolio’s risk-adjusted returns.

Our analysis of investment performance over the past 3, 5, 10 and 20 years emphasises gold’s positive impact on an institutional portfolio (Chart 11).

 

Chart 11: Hypothetical Portfolio

Gold trades more than many other major financial assets

Asset allocation: 50% stocks, 40% fixed income, 10% alternatives

Gold trades more than many other major financial assets
Average daily trading volumes over the last 5 years in US dollars*
Sources: Bloomberg, UK Debt Management Office (DMO), Germany Finance Agency, Japan Securities Dealers Association, Nasdaq, World Gold Council; Disclaimer *Based on estimated average daily trading volumes from 31 December 2017 to 31 Dec 2022, except for currencies that correspond to April 2019 to April 2022 volumes due to data availability. Fixed income trading volumes include primary dealer statistics only due to data availability. **Gold liquidity includes estimates on OTC transactions and published statistics on futures exchanges, and gold-backed exchange-traded products.

Sources: World Gold Council; Disclaimer

* as of 31 December 2022

 

Chart 11: Hypothetical Portfolio

Gold trades more than many other major financial assets

Asset allocation: 50% stocks, 40% fixed income, 10% alternatives

Gold trades more than many other major financial assets
Average daily trading volumes over the last 5 years in US dollars*
Sources: Bloomberg, UK Debt Management Office (DMO), Germany Finance Agency, Japan Securities Dealers Association, Nasdaq, World Gold Council; Disclaimer *Based on estimated average daily trading volumes from 31 December 2017 to 31 Dec 2022, except for currencies that correspond to April 2019 to April 2022 volumes due to data availability. Fixed income trading volumes include primary dealer statistics only due to data availability. **Gold liquidity includes estimates on OTC transactions and published statistics on futures exchanges, and gold-backed exchange-traded products.

Sources: World Gold Council; Disclaimer

* as of 31 December 2022

 

Chart 11: Hypothetical Portfolio

Gold trades more than many other major financial assets

Asset allocation: 50% stocks, 40% fixed income, 10% alternatives

Gold trades more than many other major financial assets
Average daily trading volumes over the last 5 years in US dollars*
Sources: Bloomberg, UK Debt Management Office (DMO), Germany Finance Agency, Japan Securities Dealers Association, Nasdaq, World Gold Council; Disclaimer *Based on estimated average daily trading volumes from 31 December 2017 to 31 Dec 2022, except for currencies that correspond to April 2019 to April 2022 volumes due to data availability. Fixed income trading volumes include primary dealer statistics only due to data availability. **Gold liquidity includes estimates on OTC transactions and published statistics on futures exchanges, and gold-backed exchange-traded products.

Sources: World Gold Council; Disclaimer

* as of 31 December 2022

 

Chart 11: Hypothetical Portfolio

Gold trades more than many other major financial assets

Asset allocation: 50% stocks, 40% fixed income, 10% alternatives

Gold trades more than many other major financial assets
Average daily trading volumes over the last 5 years in US dollars*
Sources: Bloomberg, UK Debt Management Office (DMO), Germany Finance Agency, Japan Securities Dealers Association, Nasdaq, World Gold Council; Disclaimer *Based on estimated average daily trading volumes from 31 December 2017 to 31 Dec 2022, except for currencies that correspond to April 2019 to April 2022 volumes due to data availability. Fixed income trading volumes include primary dealer statistics only due to data availability. **Gold liquidity includes estimates on OTC transactions and published statistics on futures exchanges, and gold-backed exchange-traded products.

Sources: World Gold Council; Disclaimer

* as of 31 December 2022

 

Chart 11: Hypothetical Portfolio

Gold trades more than many other major financial assets

Asset allocation: 50% stocks, 40% fixed income, 10% alternatives

Gold trades more than many other major financial assets
Average daily trading volumes over the last 5 years in US dollars*
Sources: Bloomberg, UK Debt Management Office (DMO), Germany Finance Agency, Japan Securities Dealers Association, Nasdaq, World Gold Council; Disclaimer *Based on estimated average daily trading volumes from 31 December 2017 to 31 Dec 2022, except for currencies that correspond to April 2019 to April 2022 volumes due to data availability. Fixed income trading volumes include primary dealer statistics only due to data availability. **Gold liquidity includes estimates on OTC transactions and published statistics on futures exchanges, and gold-backed exchange-traded products.

Sources: World Gold Council; Disclaimer

* as of 31 December 2022

 

Chart 11: Hypothetical Portfolio

Gold trades more than many other major financial assets

Asset allocation: 50% stocks, 40% fixed income, 10% alternatives

Gold trades more than many other major financial assets
Average daily trading volumes over the last 5 years in US dollars*
Sources: Bloomberg, UK Debt Management Office (DMO), Germany Finance Agency, Japan Securities Dealers Association, Nasdaq, World Gold Council; Disclaimer *Based on estimated average daily trading volumes from 31 December 2017 to 31 Dec 2022, except for currencies that correspond to April 2019 to April 2022 volumes due to data availability. Fixed income trading volumes include primary dealer statistics only due to data availability. **Gold liquidity includes estimates on OTC transactions and published statistics on futures exchanges, and gold-backed exchange-traded products.

Sources: World Gold Council; Disclaimer

* As of 31 December 2022

It shows that an average USD portfolio would have achieved higher risk-adjusted returns and lower drawdowns if 2.5%, 5%, 7.5% or 10% were allocated to gold (Chart 12 and Table 1).

 

Chart 12: Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio

 

Strat Ass 2023: Chart 12

Performance of a hypothetical portfolio with and without gold*

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* Based on US dollar performance between 31 December 2002 and 31 December 2022

 

Chart 12: Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio

 

Strat Ass 2023: Chart 11 [GBP]

Performance of a hypothetical portfolio with and without gold*

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* Based on GBP performance between 31 December 2002 and 31 December 2022

 

Chart 12: Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio

 

Strat Ass 2023: Chart 11 [EUR]

Performance of a hypothetical portfolio with and without gold*

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* Based on EUR performance between 31 December 2002 and 31 December 2022

 

Chart 12: Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio

 

Strat Ass 2023: Chart 11 [JPY]

Performance of a hypothetical portfolio with and without gold*

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* Based on JPY performance between 31 December 2002 and 31 December 2022

 

Chart 12: Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio

 

Strat Ass 2023: Chart 11 [AUD]

Performance of a hypothetical portfolio with and without gold*

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* Based on AUD performance between 31 December 2002 and 31 December 2022

 

Chart 12: Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio

 

Strat Ass 2023: Chart 11 [CNY]

Performance of a hypothetical portfolio with and without gold*

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* Based on CNY  performance between 31 December 2007 and 31 December 2022

Table 1: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns

Comparison of an average hypothetical USD portfolio and an equivalent portfolio with 5% gold over the past 3, 5, 10 and 20 years based on US-dollar returns*

  3-year 5-year 10-year 20-year
  No gold 5% gold No gold 5% gold No gold 5% gold No gold 5% gold
Annualised return 2.3% 2.5% 3.7% 3.9% 5.3% 5.1% 6.8% 6.9%
Annualised volatility 13.2% 12.7% 11.3% 10.9% 9.0% 8.7% 9.7% 9.5%
Risk-adjusted return 17.3% 20.0% 33.0% 36.4% 58.6% 58.9% 69.4% 73.0%
Maxiumum drawdown -19.9% -19.3% -19.9% -19.3% -19.9% -19.3% -35.3% -33.0%

*As of 31 December 2022
Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Table 1: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns

Comparison of an average hypothetical GBP portfolio and an equivalent portfolio with 5% gold over the past 3, 5, 10 and 20 years based on GBP returns*

3-year 5-year 10-year 20-year
  No gold 5% gold No gold 5% gold No gold 5% gold No gold 5% gold
Annualised return 2.4% 2.8% 3.9% 4.3% 7.1% 7.0% 7.6% 7.8%
Annualised volatility 11.1% 10.4% 9.6% 9.0% 8.4% 8.1% 8.7% 8.4%
Reward to risk 21.5% 26.9% 40.8% 47.0% 84.9% 86.5% 87.3% 92.7%
Maxiumum drawdown -13.8% -12.6% -13.8% -12.6% -13.8% -12.6% -21.2% -18.2%

*As of 31 December 2022
Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Table 1: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns

Comparison of an average hypothetical EUR portfolio and an equivalent portfolio with 5% gold over the past 3, 5, 10 and 20 years based on EUR returns*

3-year 5-year 10-year 20-year
  No gold 5% gold No gold 5% gold No gold 5% gold No gold 5% gold
Annualised return 2.0% 2.4% 4.2% 4.5% 6.4% 6.3% 6.4% 6.6%
Annualised volatility 12.3% 11.6% 10.5% 10.0% 8.7% 8.3% 8.5% 8.1%
Reward to risk 16.3% 20.6% 39.8% 45.5% 73.4% 75.8% 75.3% 81.1%
Maxiumum drawdown -14.1% -13.3% -14.1% -13.3% -14.1% -13.3% -30.8% -28.1%

*As of 31 December 2022
Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Table 1: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns

Comparison of an average hypothetical JPY portfolio and an equivalent portfolio with 5% gold over the past 3, 5, 10 and 20 years based on JPY returns*

3-year 5-year 10-year 20-year
  No gold 5% gold No gold 5% gold No gold 5% gold No gold 5% gold
Annualised return 6.57% 6.97% 5.36% 5.68% 7.69% 7.64% 6.17% 6.38%
Annualised volatility 11.58% 11.05% 10.58% 10.12% 9.40% 9.02% 10.46% 10.17%
Reward to risk 56.71% 63.10% 50.71% 56.15% 81.86% 84.72% 59.00% 62.75%
Maxiumum drawdown -13.50% -12.57% -13.50% -12.57% -13.50% -12.57% -39.61% -37.86%

*As of 31 December 2022
Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Table 1: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns

Comparison of an average hypothetical AUD portfolio and an equivalent portfolio with 5% gold over the past 3, 5, 10 and 20 years based on AUD returns*

3-year 5-year 10-year 20-year
  No gold 5% gold No gold 5% gold No gold 5% gold No gold 5% gold
Annualised return 2.64% 2.97% 5.41% 5.72% 8.42% 8.33% 6.29% 6.43%
Annualised volatility 8.18% 7.59% 7.29% 6.79% 6.67% 6.36% 6.57% 6.26%
Reward to risk 32.32% 39.11% 74.18% 84.16% 126.15% 131.00% 95.68% 102.71%
Maxiumum drawdown -11.52% -10.75% -11.52% -10.75% -11.52% -10.75% -18.66% -15.50%

*As of 31 December 2022
Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Table 1: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns

Comparison of an average hypothetical CNY portfolio and an equivalent portfolio with 5% gold over the past 3, 5, 10 and 20 years based on CNY returns*

3-year 5-year 10-year 20-year
  No gold 5% gold No gold 5% gold No gold 5% gold No gold 5% gold
Annualised return -0.01301 -0.00878 0.010499 0.014662 0.036519 0.036333 0.022263 0.024393
Annualised volatility 0.104498 0.100339 0.09455 0.090421 0.090466 0.086954 0.115821 0.111459
Reward to risk -0.12446 -0.08754 0.111039 0.162158 0.403673 0.417837 0.192219 0.218852
Maxiumum drawdown -0.23133 -0.21794 -0.23133 -0.21794 -0.23133 -0.21794 -0.34744 -0.33005

*As of 31 December 2022
Source: Bloomberg, ICE Benchmark Administration, World Gold Council

In addition to a traditional historical simulation, a mean variance optimisation analysis suggests that an allocation to gold may result in a material enhancement to portfolio risk-adjusted returns by shifting the efficient frontier upwards. For example, a portfolio with gold could deliver higher return for the same level of risk, or the same return for a lower level of risk (Chart 13).

 

Chart 13: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Efficient frontier of a hypothetical average portfolio

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
Efficient frontier of a hypothetical average USD portfolio
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer * As of 31 December 2022

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 13: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Efficient frontier of a hypothetical average portfolio

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
Efficient frontier of a hypothetical average USD portfolio
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer * As of 31 December 2022

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 13: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Efficient frontier of a hypothetical average portfolio

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
Efficient frontier of a hypothetical average USD portfolio
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer * As of 31 December 2022

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 13: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Efficient frontier of a hypothetical average portfolio

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
Efficient frontier of a hypothetical average USD portfolio
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer * As of 31 December 2022

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 13: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Efficient frontier of a hypothetical average portfolio

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
Efficient frontier of a hypothetical average USD portfolio
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer * As of 31 December 2022

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 13: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Efficient frontier of a hypothetical average portfolio

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
Efficient frontier of a hypothetical average USD portfolio
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer * As of 31 December 2022

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

The ‘optimal’ amount of gold varies according to individual asset allocation decisions. Broadly speaking, the analysis suggests that the higher the risk in the portfolio – whether in terms of volatility or concentration of assets – the larger the required allocation to gold, within the range in consideration, to offset that risk (Chart 14)

 

Chart 14: The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 14: The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 14: The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 14: The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 14: The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

 

Chart 14: The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2022

Important disclaimers and disclosures [+]Important disclaimers and disclosures [-]