DIVERSIFY YOUR PORTFOLIO WITH GOLD

Gold has historically acted as a safe haven asset during times of market volatility while offering a similar historic risk/return to equities over the long run. Unlike cash which can lose value in the face of inflation, gold has a sense of everlasting value. Its physical properties as a valuable precious metal, scarcity, and role in the international monetary system has cemented its ability to help preserve wealth and purchasing power through the ages. An allocation to gold can help investors build resilience in their portfolio by generally offering downside protection during economic and financial uncertainties.

Gold vs global stocks

The 2023 ASX Australian Investor Study shows that while 58% of Australian investors invest in domestic shares, only 16% invest directly in international shares. In other words, Australians exhibit a high degree of home bias when it comes to investing.¹

This is where unhedged gold can help shine a light in your portfolio. In the foreign exchange market, gold is bought and sold in USD. As such, an allocation to gold helps add diversification to the average Australian investor’s portfolio.²

Diversification isn’t simply about having a range of different securities and assets in your portfolio. It’s about having securities that respond differently to the same factors or market situations such that if one security or asset class performs negatively, the other securities or asset classes could potentially cushion some of those losses. A low correlation means that securities or asset classes have relatively different reactions to the same factors, whilst a higher correlation means they generally behave quite similarly in most scenarios. 

As illustrated below, gold has a low correlation with Australian and global shares and bonds. This means assets like gold can serve as a good diversifier to provide additional ballast for your portfolio.

Liquidity is the ease in which an asset can be converted to cash without suffering a deep price discount. The most liquid asset we deal with on a daily basis is cash. 

It sounds counter-intuitive, but gold is one of the most high-quality liquid assets in the marketplace. There has historically always been demand to buy and sell gold. According to the World Gold Council, the gold market was estimated to be around AU$8.8tn (US$4.8tn) in 2023.³ For reference, Australia’s Domestic Equity Market was valued at $2.37tn (US$1.56tn) by market captalisation as at October 2023.⁴ What this means is that during times of market stress, if you find that it has become difficult to immediately sell your property or certain currency exposures, you should find it relatively easier to sell your gold investments.

Indeed, this type of behaviour was shown by central banks in 2022 and 2023. Central bank demand for gold across the globe soared amidst a series of geopolitical shocks such as the Russian-Ukraine War, US-China Tensions, and Israel-Hamas War, and many emerging market central banks seeking to reduce their reliance on U.S. dollar reserves. It led to a spate of haven buying as central banks looked to diversify their reserves.

Central bank demand for gold soared in 2022

In this light, gold acts as an important liquidity buffer – an asset class to easily transact in and out of without being subject to extreme changes in price.

New regime, new market approach. That’s been BlackRock’s mantra when it comes to portfolio construction. Those using the traditional approach to portfolio construction will have to tolerate more risk to achieve a similar return. Bonds aren’t offering the same cushion from stock slides as they used to. Long-term fiscal concerns and persistent inflation are making bonds a riskier asset today. All this has cast doubt on the future of the traditional 60/40 portfolio.⁵