Over the long-term, gold has provided attractive growth, second only to stocks, and helped diversify an investment portfolio against market swings. However, exchange traded fund investors should not go overboard with their exposure to the asset class.
Year-to-date, the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) have increased about 7.0%. Meanwhile, the S&P 500 index is up 8.9% this year.
Looking at gold’s long-term performance, the precious metal has a 40-year compound annual growth rate of over 7.5%, compared to the 8.2% rate for equities, reports Jeff Benjamin for InvestmentNews.
“Over the past 40 years, during periods including seven different types of crisis that investors fear most, gold has been the number one or number two performer, with just a 12% correlation to the S&P 500 Index,” Jerry Wagner, founder and president of Flexible Plan Investments Ltd., said in the article.
The low correlation to the S&P 500 provides investors with a strong diversifier, which helps diminish volatility in times of weakness in the equities markets. Additionally, the hard asset is used to hedge against inflation and acts as a safe-haven during times of market duress. [Paulson, Soros Stick With Gold ETFs]
While gold may seem like a wonder investment, most financial advisors suggest investors should keep their overall exposure to the precious metal at around 5% of their portfolios because of the unpredictable nature and volatility in gold. For instance, gold jumped 120% in 1979, followed by a 29% gain in 1980 and a 32% fall in 1981, and it took over 20 years before gold prices finished above the $594 level last reached in 1980.