New research suggests higher allocations to gold could benefit portfolios in both inflationary and deflationary scenarios
Published 11 July, 2011
Independent analysis by Oxford Economics suggests that gold’s share of an optimal portfolio is around 5% in a base long-term economic scenario featuring 2.25% growth and 2% annual inflation1. The optimal allocation rises in a more inflationary long-run scenario and also does so for more risk-averse investors in a scenario featuring weaker growth and low inflation.
The World Gold Council commissioned the study entitled ‘The impact of inflation and deflation on the case for gold’. Marcus Grubb, Managing Director of Investment, the World Gold Council, said:
“This research comes at a time when high inflation is an ongoing reality for many developing economies, while Western economies face the threat of protracted low growth, low inflation or even deflation. In this context, we wanted to understand why gold is being reconsidered as a risk management asset, particularly if one of the many divergent inflation scenarios came to pass.”
The report uses the proprietary Oxford Economics Global Model to examine gold’s performance relative to other assets under a range of inflation scenarios. It also examines the investment case for gold within a portfolio under different long-term economic conditions.
Key findings of the report are:
- Gold performs relatively well compared to other assets in a high inflation scenario as well as in a deflationary period.
- Due to its lack of correlation with other assets gold has a useful part to play in stabilising the value of a long-run portfolio even if a modest negative real annual return is assumed.
- Gold’s optimum share of an investor’s portfolio is around 5% in a base long-term case for the UK featuring 2.25% growth and 2% annual inflation1. This is a higher allocation than seen in typical mainstream portfolios, although the analysis does not include other assets such as index-linked bonds, foreign securities and other commodities.
- Gold’s optimal share in an efficient portfolio rises in a more inflationary long-run scenario and also does so for more risk-averse investors in a scenario featuring weaker growth and low inflation.
Jens Tholstrup, Managing Director, UK of Oxford Economics, commented:
“Because of its lack of correlation with other financial assets, the report shows that gold has an important role to play in stabilising the value of a portfolio, even where the conservative assumption of a modest negative real annual return is made.”
“In addition, gold offers protection against extreme events such as high inflation and financial market distress.”
Marcus Grubb, Managing Director of Investment, the World Gold Council, said:
“This study suggests that typical investor allocations to gold are sub-optimal. The vast majority of investors still have little or no allocation to gold, which places significant capital at risk.
“The evidence in favour of a continuous strategic allocation to gold has been growing for some time and gold’s benefits in an investment portfolio should be reappraised.”
The full report and video can be viewed at: www.gold.org/news-and-events
1This section is constructed from the perspective of a UK investor in order to utilise a long run of historical asset returns data (going back to 1971) available for the UK. The optimisation analysis uses a simplified model including gold, cash, equities, bonds and commercial property only.
For further information please contact:
World Gold Council
T +44 20 7826 4763
T +44 20 7255 5154
T +44 1865268918
T +44 1865268934