Gold’s many unique advantages make it an excellent portfolio addition at any time, but especially during times of uncertainty, such as those we’re experiencing right now, one macroeconomist has advised.
WisdomTree’s Head of Commodities and Macroeconomic Research, Neil Shah says gold has the power to maximise returns and substantially reduce exposure to risk when economic uncertainty peaks – with the precious metal proving its value in numerous ways. This is a particularly pertinent observation right now when the global, political and economic landscape remains uncertain.
Shah says it is essential that investors understand the heavyweight role gold can play in any portfolio, and the benefits it can bring. Perhaps gold’s key strength is that it has almost no relation to other assets, so it isn’t impacted by volatility elsewhere.
“The lower the correlation between the assets in the portfolio, the greater the benefits of diversification,” Shah explains. This is where gold shines. “While gold is technically a commodity, it behaves very differently to most cyclical commodities. The drivers of gold price (such as inflation, bond yields, exchange rates and market sentiment) make the metal appear more like a currency than a regular commodity,” Shah explains.
“So, even though gold futures are part of a broad commodity allocation, they have a relatively low correlation with the rest of the commodity complex (0.37) and so they can also be considered as a separate line item for further diversification.”
In addition to its diversification properties to lower risk, gold is also historically stable during volatility elsewhere. That makes it a highly attractive addition during times of economic and geopolitical uncertainty. With the Federal Reserve’s long-term policy plans still unknown, indictments and criminal charges looming large over Washington DC and uncertainty around the strong possibility of a recession, this safe haven status has never been as valuable as it is today.
What’s more, turmoil elsewhere holds the key to price increases, meaning now is the time to buy in order to fully capitalise.
Shar confirms this, noting “Gold prices tend to rise in financial crises, economic downturns, and geopolitical shocks.”
If your personal opinion errs more towards the Feds achieving a soft landing and swerving a recession, there’s still an extremely strong motive to add gold to your portfolio now.
“Gold has, historically, performed well in times of inflation,” Shah says. “In fact, no other asset behaves like gold: the metal performs strongly in both economic downturns and upturns.”
In fact, it’s hard to find an asset that has a better track record than the yellow metal.
“Gold performs better than any other asset in deep recessions,” Shah confirms. “It also strongly outperforms defensive assets in times of economic expansion. It even outperforms bonds (government and corporate) in times of mild recession.”
Whether you’re looking to reduce risk or diversify, gold is the clear choice.
