In this position paper, we will discuss our rationale for instituting a position in gold across our clients’ portfolios. There are many opposing viewpoints about owning gold in a diversified portfolio. We will look to address these countering points of view and explore how the current macro landscape makes the rationale for owning gold more compelling than it has been for quite some time. Specifically, we will discuss:
- Opportunity cost of owning gold – Investors often shun gold in favor of assets with a positive expected return, namely stocks and bonds. However, stocks are trading near all-time high valuations and yields on traditional bonds are anemic, making alternative investment opportunities such as gold more attractive on a relative basis.
- Traditional diversification is broken – Historically, stocks and bonds have behaved differently from one another and have therefore acted as efficient diversifiers when combined in a portfolio. However, in recent years, the data has shown that stocks and bonds have become more highly correlated with one another. Gold, on the other hand, has displayed a low correlation to both stocks and bonds over extended periods of time.
- Gold as a store of value – Gold is the one global currency that cannot be created out of thin air in this age of undisciplined money printing. All currencies are susceptible to debasement by central banks looking to stimulate their debt-ridden economies through easy monetary policies. Unlike most paper currencies, gold has maintained its value over long time periods.
We understand that this positioning may not be popular as traditional assets continue their march upward with the support of central banks. However, with the expensive nature of traditional stocks and bonds, coupled with the heightened risks of currency debasement and possible inflation, we believe that a modest allocation to gold can act as a meaningful hedge over time.