Gold Investor: risk management and capital preservation - Volume 6

Published 19th June 2014

Categories: Investment

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Aram Shishmanian

CEO World Gold Council

Welcome to the sixth edition of Gold Investor. This issue contains three thought-provoking articles, and a common thread runs through them all: the balance between diversification and performance. 

This is a highly relevant theme for two reasons. Firstly, our focus is on the value that gold can deliver to investors: gold has a well-recognised role in portfolio performance.1 Secondly, we live in the shadow of the 2008-2009 financial crisis, with its harsh lessons on risk and how to use portfolio diversification to manage it. 

In each article our analysts take a close look at a different asset class, examine its context and characteristics, and analyse how it compares to – and interacts with – gold. 

Alternative assets can deliver outperformance but fare less well as diversifiers 

First, in How gold improves alternative-asset performance, we scrutinised alternative assets – private equity, hedge funds, real estate, and commodities – to see if they deliver performance and diversification. We found good news, room for improvement and a few surprises. 
The good news is that alternatives can deliver outperformance. Some investors may be surprised to find that gold returns outperformed some alternative assets and – an important diversification- and-performance point – has a correlation to equities that is lower than any alternative asset. 

Gold is often labelled a commodity but it behaves more like a currency 

In Gold: metal by design, currency by nature we make the case for gold as a distinct asset class rather than a commodity. 

Many people find it odd that peas and courgettes (or zucchini in the US) are classified as fruits. Botany says that because they have seeds they must be fruits, but chefs use them as they would other vegetables. Our analysis shows that gold suffers from a similar kind of category confusion. It features in commodity indexes, but it responds to different economic factors (particularly those that drive currencies), is less volatile, and has a far lower correlation to the business cycle. 

Gold can deliver on liquid alts’ promise of liquidity, returns and diversification 

Finally, we look at ‘liquid alternatives’ (or ‘liquid alts’) in The most liquid of all ‘liquid alts’. Liquid alts offer investors a more liquid investment in alternative assets. They have grown dramatically since 2008 and are expected to keep rising: a Citigroup reports predicts that liquid-alt assets could reach US$1.3 trillion by 2017. 

However, when we compared liquid alts to gold we found two interesting results. Gold meets the key criteria of liquid alts as it is a non-traditional asset or strategy, is more liquid than alternative assets, and is a transparent investment. In addition, gold does not have the drawbacks – including limited liquidity and relatively high costs – that may put some investors off liquid alts. 

We hope you find this edition of Gold Investor informative and stimulating. If you have comments or questions on any of the articles please get in touch at [email protected]