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Does gold improve portfolio results? [Members]
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Very thorough analysis, thank you.
Interesting article, thanks.
Thanks for this useful article. I’ve looked at this from a couple of angles and ended up getting a small exposure. I wondered if the nature of the holding matters? Sovereigns are CGT free, ETFs rarely seem to involve real holdings sat in Fort Dettingen. So when we say ‘gold’ might what we mean by it change the picture much? As an example I have a small holding in the shares of a gold/metals streamer – pretty to close to effects of gold prices without touching it in any real form.
I am very skeptical about any asset class that doesn’t have any intrinsic value or pay interest.
I was a big fan of cash as a diversifier pre GFC. Post GFC returns on cash were depressed due to loose monetary policy leading me to equities (“TINA”). But I get closer to de-accumulation and monetary policy has normalised. So cash once more has a relatively large allocation in my portfolio. According to portfolio charts cash is almost as good a diversifier as gold and has the added advantage of not falling in nominal terms (barring bank failure, though spreading around through opening multiple accounts and/or money market funds should limit this thanks to FSCS)
Thank you TA, that was fascinating.
I hold 30% HSBC FTSE All-World and 20% VHYG for growth and my defensive allocation is 10% each of Cash / Gold / Short-ish Developed Inflation-linked Bonds (GISG) / Commodities / BHMG. I hope that when the shtf, something will be doing OK. There’s no real science behind it, it just feels OK. If not, with 50% non-equities I’ll have something to sell. The GISG and Cash should give me a decade or so of withdrawals.
I do worry about the price of gold but I’m sitting on some nice gains over the last 5 years and I’ve already banked some profits. I’ve traded in and out of it from highs of 20% to this low of 10%. Truth be told, saddo that I am, I like the neatness of 10/10/10/10/10.
Oh, and I really like the way you chop off the first few years of gold returns. I’ve always felt it was just too atypical and unrepeatable.
> Because if it doesn’t, what’s the point?
I don’t want to go full Seeking Alpha on you but the point is none of the above. It is to make you feel better in the circumstances where Kipling’s If applies.
But only up to a point. If it’s a war of all against all gold in any form is no good, for sure, nothing really is though guns beans and ammo maybe.
I do not expect gold to hedge against inflation. I do not expect it to increase performance, other than under circumstances I quite frankly never hope to see. As for boosting risk-adjusted returns, if you can qualify and quantify the sort of tail risks where gold boosts returns I tip a hand to a degree of omniscience I don’t have, I think of it more as insurance than asset class.
It’s an outlier, and you just can’t make the rational case for or against. We aren’t just brains in a jar. Warren Buffet sums up the problem well enough – gold is not productive, so maybe don’t carry it for half a lifetime, with the exception of jewellery.
It’s probably fair to say that if you’re holding more than a third in gold then you should reconsider your friends and/or sources of news. As an earlier post said
It also depends on your stage of life and balance of human capital against financial capital, it’s more an old man’s game. Nobody at 21 should be holding a lot of gold. Moderation in all things, some is good, more is not always better.
The case for it or not depends very much on your temperament, which is why it’s hard to make any analytical case for or against. So bravo for making the attempt to qualify this, but without allowing for the stage of life and perspective it’s not a tractable task.
@ Prospector – I’m a fan of holding a chunk in cash too, as are many on Monevator. Kind of surprising as it’s had a poor 15 years or so. Possibly that’s the money illusion effect but there is something reassuring about an asset that can’t shed 30% on a computer screen. At least in nominal terms. If Portfolio Charts went back to 1900 I think it’d show an even stronger case for cash as a diversifier, though its overall long-term returns have been about half those of gilts.
@ Brod – I share your intuition. There’s not a single asset class that can’t break your heart for multiple decades at a stretch including equities, particularly when you look beyond the benign case of US asset classes. Hence broad diversification across low correlated assets makes sense while optimisation is an act of faith that refuses to admit the limits of the knowable. BTW, I think you’re right to take the profits!
@ Ermine – nice. Agree about the yoot. I try to acknowledge your stage-of-life point in every gold post by warning off early stage accumulators, perhaps not forcefully enough? From my perspective, I do think there’s a rational case but it’s so marginal it makes me itch. That itch is the discomfort of doubt. The chafing of the underpants of uncertainty.
Tyler of Portfolio Visualiser fame recently gave an interview about his views on gold and seemed to favour a 20% Gold allocation at all times for a long term portfolios with superior benefits in the areas of risk,volatility and performance
Unfortunately I cannot retrieve this particular recent interview but perhaps someone else can
xx09
@xxd09 — I’m guessing you’re thinking of the Many Happy Returns podcast I included in Weekend Reading? 🙂
https://many-happy-returns.captivate.fm/episode/building-a-bulletproof-retirement-portfolio
Excellent analysis. Thank you @TA. I really enjoy these deep dives.
For me Gold (and, for that matter, Broad Commodities, Global Macro and Trend Following/Managed Futures) comes down to balancing potential diversification and rebalancing premium benefits against having less to invest into Global Equities.
The obvious ‘Game Changer’ will be if (and when) US return stacked ETFs (finally) become available here in the UK to retail investors as either a UCITs equivalent product or one exempt from / deemed conforming with PRIIPS and MIFID2.
Then it will, at least in theory, perhaps become possible to have ones cake and eat it using WisdomTree’s Efficient Gold Plus Equity Strategy Fund (GDE ETF) and/or their Efficient Gold plus Gold Miners Strategy Fund (GDMN ETF), which respectively are:
a). 90% gold and 90% S&P 500 equities; and,
b). 90% gold and 90% gold miners.
So each leveraged 1.8x.
I haven’t heard the podcast but bear in mind that Tyler’s view will likely be from a US perspective.
His Golden Butterfly portfolio includes 20% gold but it’s based on returns from 1970.
Here’s the UK version (though you’ll see that Tyler uses Europe equity data instead of World or UK for some asset classes)
https://portfoliocharts.com/portfolios/golden-butterfly-portfolio/#performance
Essentially it’s an all-weather portfolio (or permanent portfolio variant) with a solid allocation to equities, long term bonds, short-term bonds and gold.
I think all-weather portfolios make a lot of sense but the first thing I’d do is split the 20% gold fifty-fifty between gold and commodities.
Great article, TA. Thanks!
Here is my practical experience with gold in the portfolio.
I’ve been holding some gold in my portfolio for a bit over 6 years now. As you mention above, gold really lowers the volatility of the portfolio. I’ve been tracking the valuation weekly all these years and the average volatility has always been a bit less than 6% annualised. My allocation now is 48% equities (with a bias to value and small cap and almost equal weight to America, Europe/UK, and Asia/Pacific but slightly more in Asia/Pacific and Europe/UK than in America), 22% in gold, and 30% in short duration bonds (mostly hedged US treasuries, developed European government bonds, and UK gilts but also some unhedged treasuries, almost half are inflation linked). The annualised return is reasonable at about 9.8%. The last Morning Star report says that I beat an international 60/40 portfolio in return and also manage to get a lower volatility.
During the COVID drawdown, the worst it went down was about 3% and then it recovered much quicker than a 60/40 portfolio.
Bill Bonner has 2 nice charts on his most recent Substack post giving the bang up to date inflation adjusted gold price (London pm fix, 2024 value $ per troy ounce) from 1970 to date and the DJIA index to gold price ratio from 1900 to date:
https://open.substack.com/pub/bonnerprivateresearch/p/revelation
Frankly, I don’t actually know if either chart tells us anything useful or not, and, if so, then what exactly any such utility is, and in which contexts and what circumstances it might then be useful; but neither does anyone else.
My vague takeaways are gold is possibly quite expensive compared to fiat money but at a 17 to 1 ratio with the DJIA index maybe not expensive compared to equities. Again though, who knows what to make of it?
Fascinating (albeit quite detailed) research on gold and gold equities published today here:
https://blog.gorozen.com/blog/gold-stocks-cheap
And the launch of the gold income shares ETF recently covered (under point 2 of ‘Investment Ideas’) here:
https://open.substack.com/pub/davidstevenson/p/weekly-note-october-event-more-trust
Much obliged! Thank you Delta Hedge!
Excellent quote today from Bill Bonner at Bonner Private Research on gold, which IMHO gets to the heart of it: “Gold is not an investment. It is an anti-investment”.
It is a non-income generating, essentially (jewellery aside) non-use ‘thing’ (and not a commodity asset) which, due to its chemical stability (it doesn’t rust etc), its malleability (it’s easy to shape into bars and coins), its great relative rarity (all the gold ever mined fits into a small house sized cube), its longevity (6,000+ years as a ‘treasury asset’) and it’s (typically) somewhat low to negative correlations with shares and bonds might make a 5% to 10% allocation to gold appropriate as a general risk mitigating feature of portfolio construction.
Although I personally prefer equities for the long term as inflation beating, gold also does seem to hold its value somewhat – give or take – over time.