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).
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.
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
Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio
Risk-adjusted returns of a hypothetical portfolio with and without gold*
Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio
Risk-adjusted returns of a hypothetical portfolio with and without gold*
* Based on US dollar performance between 31 December 2003 and 31 December 2023.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Sources:
Bloomberg,
ICE Benchmark Administration,
World Gold Council; Disclaimer
* Based on US dollar performance between 31 December 2003 and 31 December 2023.
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
2.5%
2.6%
7.7%
7.9%
5.5%
5.6%
6.3%
6.4%
Annualised volatility
11.6%
11.3%
11.9%
11.5%
9.5%
9.2%
9.9%
9.6%
Risk-adjusted return
21.5%
22.8%
64.5%
68.2%
57.9%
60.5%
63.3%
66.9%
Maximum drawdown
-19.9%
-19.3%
-19.9%
-19.3%
-19.9%
-19.3%
-35.3%
-33.0%
*As of 31 December 2023. 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 a 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 2023.
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).
