Gold grows

And three other reasons the metal makes for a meaningful addition to portfolios today

Andrew Willis 15 May, 2019 | 2:00PM

 

 


Andrew Willis: Gold's ability to hold value led it to being tied to the dollar. But ever since it was unleashed to the free market in 1971, we've seen many more valuable attributes shine through for investors.

First and foremost, it isn't just a store of wealth. Gold grows. If you go back to 1971 and look at its performance since then, you will find that it's grown at an annual rate of 7.5%. It doesn't yield anything, but gold grows when economies grow, whether it's in demand as a form of jewelry, especially in emerging markets, in electronics or as a source of savings. It has a legacy of applications that make it highly sought after.

Secondly, gold is a great diversifier. It isn't really correlated to stocks. So, it's hard to go wrong when opting to use it as a hedge against the movements of the market. It is correlated to a weak dollar and inflation. So, it serves the portfolio well when you are positioning your portfolio for economic uncertainty.

Thirdly, it's highly liquid. With the advent of easy-to-use gold ETFs now topping over US$103 billion in assets under management efficient access to buyers and sellers is getting easier every day. But when you include physical gold and over-the-counter trades, we are talking about over US$180 billion changing hands every year.

And the fourth and final reason gold continues to shine for investors today is how it improves a portfolio's risk-adjusted returns as a strategic asset. Because of its unique relationship to the market it's correlated positively to economic growth but negatively to economic decline. This allows this strategic asset to capture some of the upside while less of the downside making this metal a meaningful addition to a balanced portfolio.

For Morningstar, I'm Andrew Willis.

About Author

Andrew Willis

Andrew Willis  Andrew Willis is a content editor for Morningstar.ca.