Holding 5% gold is portfolio optimum new research suggests

Investors should stock their portfolio with 5% gold in order to best overcome the effects of both inflation and deflation, according to new research by Oxford Economics and published by the World Gold Council.

Oxford economics suggests the 5% exposure level in the context of a long-term scenario of 2.25% growth and 2% annual inflation. These figures relate to UK investors, and are based on historical asset returns data going back to 1971.

The analysis by the research organisation relied on a simple model including gold, cash, equities, bonds and commercial property. However, it goes on to add that the allocation rises in a higher inflation scenario, as it does for risk-averse investors in an environment of even weaker growth and low inflation.

The research also concluded that gold performs well compared to other assets in both high inflationary periods and in deflationary periods. Its lack of correlation with other assets helps stabilise the performance of long-run portfolios.

Marcus Grubb, managing director of Investment, the World Gold Council, which commissioned the work, said: “The research comes at a time when high inflation is an ongoing reality for many developing economies, while Western economies face the threat of protracted low growth, low inflation or even deflation. In this context, we wanted to understand why gold is being reconsidered as a risk management asset, particularly if one of the many divergent inflation scenarios came to pass.”

Jens Tholstrup, managing director, UK of Oxford Economics, said: “Because of its lack of correlation with other financial assets, the report shows that gold has an important role to play in stabilising the value of a portfolio, even where the conservative assumption of a modest negative real annual return is made.”

“In addition, gold offers protection against extreme events such as high inflation and financial market distress.”

The full report can be viewed at: www.gold.org/media/

A video outlining the report’s findings can be viewed at: http://www.gold.org/video/play/inflation_and_deflation_video/

 

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