Gold As A Strategic Asset

The World Gold Council has recently posted its analysis of the continued relevance of gold.

As one might expect from the source, the WGC finds that gold is a strategic asset that can play several valuable roles in a portfolio.

Toward this end, the paper offers a chart of gold’s returns over three distinct time horizons: 10 year, 20 year, and since 1971. The last of those periods, then (I’ll spare you the arithmetic) is 47 years. It is significant because 1971 is the year that President Richard Nixon pulled the United States out of the Bretton Woods system created by the victors in World War II.Since 1971, the dollar has been free to float as against the value of gold and by virtue of logical equivalence the value of gold has been free to float against the U.S. dollar. So this is the longest continuous time horizon available.

Looking at the whole period since 1971, then, gold has been the third best performing asset, coming in just below US and EAFE equities, just ahead of commodities, and well ahead of both US bond aggregates and US cash.

This means, says WGC, that “gold has not just preserved capital,” but has helped capital grow. It has consistently outpaced inflation.

Gold-backed ETFs were first launched in 2003. They have become important market participants, amassing more than 2,000 tons of the precious stuff, worth nearly $100 billion.

Central banks have been net buyers for the last eight years.

Diversification that Works

But it isn’t merely standalone performance that recommends gold, the WGC says. It is gold’s stature as an example of “diversification that works.” When correlations among all other asset classes are rising, gold remains aloof from the pack.  Panics that send people away from everything else (thus increasing correlations) send them toward gold. During the 2008-09 crisis, for example, “hedge funds, broad commodities and real estate, long deemed portfolio diversifiers, sold off alongside stocks and other risk assets.” That was not, though, true of gold.