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Throughout recorded history, gold – rare and unreactive – has held its place as a coveted precious metal. Useful as both a store of value and as a means of exchange, in the modern era, gold has a core part to play in investor portfolios. Exposure to it offers investors three key benefits: insurance against shocks, risk-based diversification and – most significantly in our current environment - a hedge against inflation.
The only free lunch in financial markets?
The diversification effect is not only about adding an additional asset class, it is about an uncorrelated return pattern relative to both equities and bonds. Of all the precious metals and broader commodities traded, gold holds its own as the most powerful diversifier, exhibiting consistently low correlation with other major asset classes.
Resistance to volatility
Not only does gold outperform other commodities over time but it has also tended to perform positively when volatility increases. In periods of high inflation and currency devaluation, gold serves to protect investors’ purchasing power. Gold’s insurance characteristics mean that the optimal allocation for gold increases when risk in a portfolio increases.
In the ultra-low interest rate environment of today, increasing inflation fears means negative real yields, therefore the opportunity cost of holding non-income-generating assets is declining. While commodities provide near-term inflation protection particularly when related to supply shocks, gold has typically provided greater inflation protection characteristics during inflationary regimes, in part because the gold price reflects broader economic growth as defined by consumer price inflation and money supply.
Not the only precious metal diversifier
Gold is by no means alone in the precious metals category. Other key metals in the asset class include silver, platinum and palladium, each with characteristics of their own. All three carry significant value as industrial metals required in manufacturing of batteries, super-conductors and within the auto industry, rendering their prices more vulnerable to supply and demand fluctuations, and thus increased volatility. We explore the value they can offer and the role they can play within a portfolio.
How to gain access as a retail investor?
While professional investors can gain access to gold via the Futures market, what are the options available to UK advisers when constructing a retail client portfolio? From precious metal ETPs to funds of producers to simply buying and storing a bar of gold, we delve into the pros and cons, offering an unbiased overview of the opportunities available.