Precious metals have been among best performers this year, but investors shouldn’t wait for conditions to be just right before looking into gold allocations.
Gold should not be used as part of a market-timing trade, but rather as a core investment portfolio diversifier, Jerry C. Wagner, President and Founder of Flexible Plan Investments, said on the recent webcast, What’s the Optimal Percent Allocation to Gold?.
In a 43-year study of gold measured against all asset classes, titled The role of gold in investment portfolios, he found that the precious metal showed an average correlation of 0.06, which suggests that there is almost no relationship or dependency with other basic asset classes, making bullion a great portfolio diversifier.
“Financial advisors have long valued gold as a diversifier because it doesn’t always move the same way stocks or bonds do. Studies show that gold is superior to general commodity exposure in portfolio construction in several market scenarios,” Wagner said.
Financial advisors on the webcast also seem to agree with this sentiment. In a survey of advisors attending the webcast, 86% of respondents pointed to portfolio diversification as the main draw for gold investments, compared to 3% looking for the best tax treatment and 11% shooting for short-term performance.
Wagner pointed to seven scenarios where gold has outperformed: Real returns on the 10-year Treasury bond are negative. Equities are in a bear market. Commodity prices are in a bull market. The U.S. dollar is in a bear market. U.S. Treasury bonds are in a bear market. Inflation is rising. Lastly, market volatility is high.
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Gold can “act as an important counterbalancing portfolio component under a variety of very specific market and economic conditions,” Wagner said.
However, Wagner warned that gold may underperform when the economy is suffering through deflation.
Currently, gold has enjoyed a great year as unconventional monetary policies, depreciating currencies and negative interest rates helped drive record demand for gold investments.